Question

In the early January 2022 (ie, before Russia invaded Ukraine), big U.S. banks say spending patterns show consumers are in good shape. On the basis of the class discussion on consumption, which of the followings is not the reason behind such optimistic views on US consumption spending prospect at that time?

a. Potential spending capacity such as relatively high deposit balances (ie, saved money) of US households

b. Room for further borrowings due to lower household debt (for example, credit card balances remain well below the pre-pandemic peak)

c. Record highs of consumer sentiment

d. Significant gains in household networth (driven by housing market boom and strong stock market performance during 2021)

Answer 1

The incorrect reason is 'Record highs of consumer sentiment,' as consumer sentiment, despite being influenced by wealth and credit conditions, was not at record highs during the period in question, particularly given other economic indicators.

Step-by-step explanation:

The question is asking which reason was not a factor contributing to optimistic views on US consumption spending prospects in early January 2022. From the options provided, we can deduce that the incorrect reason is option (c) Record highs of consumer sentiment. This is because, despite other indicators showing potential for increased consumption spending, such as high deposit balances, room for further borrowings, and significant gains in household net worth, consumer sentiment was not at record highs during that period. In fact, consumer sentiment may be affected by expectations of future income and perceptions of wealth, and it's typically influenced by economic conditions, including volatility in the stock market and housing market trends which were positive, but not enough to suggest record highs in sentiment. Furthermore, historical examples show us that consumer sentiment can decline significantly during economic downturns or stock market crashes, as evidenced by the increase in savings rates and reduction in consumption following the market decline from March 2008 to March 2009.