Disappointing figures announced by the Commerce Department late last month triggered further economic concerns. The reported gross domestic product growth rate of only 0.2 percent for the first quarter of 2015 and the -0.1 percent annual inflation rate were far below estimates and deeply discouraging.
At the same time, Federal Reserve policymakers announced there would be no immediate change in interest rates. A number of factors were cited in defending the rate hold, including slower job growth and continued "underutilization of labor resource."
The Fed recognized that "business fixed investment softened." Companies are reluctant to trust figments of confidence without hard data support.
The fact that household real incomes rose strongly but growth in household spending declined points to a central problem in the Feds economic recovery strategy. Consumer demand is based on not only income but outlays. Without confidence, the profile of consumer spending is geared more toward frugality rather than spending on non-essentials.
The Commerce Department reported personal incomes, disposable incomes and outlays were up in the first quarter of 2015, yet personal savings increased by $124.4 billion. This occurred despite negative real interest rates of return on bank deposits.
Savings increase during times of uncertainty. A lack of confidence may explain the increase in saving and why, with unprecedented amounts of ultra-cheap liquidity, consumers are not spending liberally and businesses are not expanding.
Uncertainty caused by ever-changing government regulations and taxes is cited often as the reason for low corporate investment and employment.
Since 2008, the Fed has paid its member banks 0.25 percent on deposited excess reserves. According to the St. Louis Fed, excess bank reserves on March 29 stood at $2.6 trillion. This represents money that banks deposit with the Fed rather than lend to riskier small, job-adding companies.
According to Moodys, cash holdings of US corporations increased between 2006 and 2013 by 81 percent to $1.5 trillion, partly hoarded offshore because of relatively high taxes. In addition, companies such as Wal-Mart have borrowed at rates as low as 0.6 percent to boost their coffers.
Uncertainty may breed frugality among consumers, corporations and banks intent on saving to meet unforeseen changes. For stimulus to work, clarity must replace government unpredictability.
Lynn Franco, director of economic indicators and consumer surveys at The Conference Board, said she believes the fall in consumer confidence was "prompted by a softening in current conditions ... and apprehension about the short-term outlook."
Consumer confidence encourages business investment in jobs boosting income, consumer demand, business expansion and economic growth. Acting alone, the Fed cannot generate income-based consumer demand. Consumers need the security of more income before spending more freely.
Otherwise, the Feds stimulus appears doomed like the situation in Japan after 14 years of even greater monetary stimulation.