US consumer confidence plummeted to its lowest level since 2014, with consumer spending cooling across the board, leaving the Federal Reserve facing a policy dilemma.

U.S. consumer confidence plummeted in September, hitting a more than ten-year low, as high energy prices and inflationary pressures continued to erode real household income, leading to a contraction in demand for housing, cars, and major appliances.

According to data released on Tuesday, the Conference Board's consumer confidence index fell 6.7 points to 81.9 in September, the lowest level since 2014 and far below all forecasts from economists surveyed by Bloomberg.

This deterioration in confidence is widespread, affecting all age groups, income levels, and regions. The survey period was from September 1st to September 23rd.

At the same time, sub-indicators reflecting the current economic situation plummeted by nearly 8 points to their lowest level since 2021; the indicator for expectations over the next six months also slipped to its lowest point in more than a year.

Inflation expectations are rising, with the proportion of respondents anticipating further interest rate increases reaching a more than four-year high. Analysts warn that a new round of compression in real income will pose a significant headwind to economic growth.

Energy prices drive pessimistic sentiment

Data from the American Automobile Association (AAA) shows that gasoline prices have surged to over $4 per gallon due to the war in Iran; U.S. retail diesel prices are near record highs, and heating fuel costs have also risen sharply ahead of winter.

Conference Board Chief Economist Dana Peterson stated in a press release:

"In September, pessimism dominated consumer written responses describing factors affecting the economy. Statements concerning prices, high costs of goods and services, and especially oil and gas prices all reached new highs."

The report shows that consumers' purchasing plans have generally contracted – the proportion of respondents planning to purchase cars, houses, and various large home appliances has declined, and the transmission effect of living cost pressures on actual consumption decisions is becoming apparent.

Optimism in the job market has fallen to a multi-year low.

The outlook for the labor market has also cooled significantly.

A September survey showed that the proportion of consumers who felt jobs were easy to find fell to its lowest level since 2021, while the proportion who felt jobs were difficult to find rose accordingly, narrowing the gap to its smallest in over five and a half years. This indicator is considered by economists as an important reference for tracking the health of the job market.

Government data released on the same day showed that the number of job openings fell to a five-month low in August , corroborating the results of consumer surveys, indicating that the resilience of the job market is weakening at the margin.

Furthermore, income expectations have deteriorated simultaneously. The proportion of respondents expecting income to grow in the next six months has fallen to its lowest level this year, while the proportion expecting income to decline has risen to its highest level in over a year.

The Federal Reserve faces a dilemma in its policy direction.

Faced with these signs of declining confidence, the market is divided on the scope for further interest rate hikes by the Federal Reserve. The Federal Open Market Committee (FOMC) announced an interest rate hike this month, and since then, several officials have stated that borrowing costs should remain at a higher level.

However, Pantheon Macroeconomics economists Samuel Tombs and Oliver Allen pointed out in their research report:

"While high energy prices are exacerbating inflationary pressures in some sectors, a new round of pressure on real incomes will be a major headwind for economic growth, requiring the FOMC to remain cautious on further interest rate hikes."

It is worth noting that despite continued pressure on consumer confidence, current consumer spending and the labor market as a whole still show some resilience. However, with the confidence index hitting a ten-year low and purchasing intentions contracting across the board, whether this resilience can be sustained will be a key variable closely watched by the market.

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