Sentiment drives spending. And right now? Sentiment is tanking.
KEY TAKEAWAYS
MY HOT TAKES
Confidence in confidence - on soft, soft numbers. Good morning regular readers. I am sure that you have a good inkling of what I am going to write about today. You are all well read in on my obsession with consumption and consumer sentiment. The relationship between consumer confidence, consumption, and GDP is not an esoteric one. It is so important that I want to make it clear YET AGAIN… again. Two-thirds of GDP comes from consumer spending (you and me), that is a direct and mathematical relationship. It’s just math, stupid… er, silly. Now, I have to ask you a question. If you were worried about the economy, your job prospects, inflation jumping above 6% 😮, and interest rates remaining higher for longer, would you possibly forego certain expenditures to be on the safe side? Come on, be honest. Of course, you would at least possibly start to conserve a bit more. That notion is the driving basis for my oft-quoted “confident consumers consume.” Implied in that is “unconfident consumers conserve.”
Is it reasonable to assume, therefore, that while you might not cut back right away, you would certainly become more judicious in your big purchase decisions? It is. What if you heard that the stock market has exhibited.. um, lackluster performance year to date? Well, folks all of these conditions exist, and the Conference Board along with a bunch of my academic friends at University of Michigan poll consumers on the regular and ask them similar but expertly devised questions to get a feel for what consumers are feeling about their current and future financial prospects amongst other things.
Well, do you want to know what a good statistical sample thinks about all these things? For my nonacademic friends, a “good statistical” sample is a small polling group chosen from a population that fairly represents the whole (it’s a stats thing). I think that the best way to start this out is to simply show you a chart or two. Let’s start with University of Michigan Sentiment, the more comprehensive of the two mainstream sentiment indicators. Check it out, then keep reading.
You will note on this chart how sentiment declined steadily from pre-pandemic levels to a bottom point in mid-2022 as the Fed was assaulting the economy with interest rate hikes. A somewhat steady recovery ensued thereafter with inflation slowly cooling, solid equity returns, and interest rate cuts. A marked shift occurred at the beginning of the year as the new administration took office, sending the index to levels not seen since 2022. Additionally, 1-year inflation expectations rose to 4.9% from 2.6% last November. A similar jump can be seen in long-term inflation expectations.
Now moving on to the Conference Board Consumer Confidence Index which we learned yesterday dropped from an upward-revised 100.1 to a below-estimate 92.9! 🤮 The latest print is the lowest in four years. Similar to U-Mich Sentiment, the Conference Board polls on current and future expectations. That is where this survey gets interesting. Yesterday’s reported expectation dropped almost 10.0 points to 65.2, which is the lowest level in 12 years (that’s not a typo). The Conference Board Considers has said that readings below 80.0 often signal that a recession will occur within a year. Anecdotal information collected suggested that much of the concern is around trade policies, which I am sure doesn’t surprise you. When polled on inflation expectations, respondents increased those to the highest level in 2 years. Finally, expectations for future finances declined to the lowest level since the summer of 2022. Check out this neat snapshot of some of those critical indicators courtesy of my friends at Bloomberg.
Do these sentiments align with yours? You may not strongly agree or strongly disagree, but these things are most certainly on your mind, in other words, you probably agree. The big question is will these sentiments inform consumption and complete the circle causing an economic slowdown? Last week, the Fed Chairman attempted to downplay declining sentiment (before he saw yesterday’s unattractive print–I am being generous) by calling sentiment numbers “soft,” preferring instead to wait for “hard” data which would be actual economic declines. This implies that the Fed will continue its policy of reaction versus proaction. I know that three charts is a lot for one blog post, but I simply had to drop one final one on you. Check it out and follow me to the close.
This chart shows Conference Board Consumer Confidence going back to the year the company started measuring it. The red bars are US Recessions. I am not sure what I might be missing, but it seems pretty clear to me that decays in confidence almost always preceded the onset of recessions. The rule of thumb for recessions is a contraction in economic growth defined by at least two consecutive quarters of declines, though technically the National Bureau of Economic Research (NBER) makes the determination using a number of indicators. One of the most important indicators just happens to be personal consumption expenditures. Why? Well, you know exactly why. If you forgot, just reread paragraph #1 in this morning's post. So you don’t think that I am all doom and gloom, there is a silver lining in the chart. You can see that while yesterday’s number was not great, overall Consumer Confidence has been worse. Is that any cold comfort for you?
YESTERDAY’S MARKETS
Stocks closed higher yesterday after an abysmal Consumer Confidence figure showed consumer angst over tariff uncertainty and high inflation expectations. Markets remained buoyant on hopes that next week’s tariff barrage would be measured after last weekend reporting that the Administration is considering exemptions.
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