What declining consumer confidence can do to the economy and your stock portfolio

Chinese bullishness was imported into yesterday’s US stock market gains with the PBOC joining the stimulus bandwagon. Consumer Confidence is eroding more than economists were expecting creating clouds over the economy’s future.

Money can’t buy you happiness... But it sure comes in handy at the grocery store, when paying health insurance premiums, buying computers, paying the cat groomer, paying term bills, buying a new home, renewing your Netflix subscription, upgrading your iPhone… etc. Did I get you in at least one of those categories? Of course, I did. Even if I didn’t, it doesn’t take a genius to figure out that money- having it - is kind of useful. What if I told you that the economy was going to go into a recession in the next year and that you might lose your job? Would you just keep on partying like its 2021? You don’t have to answer that question, it was rhetorical.

Let’s start with my favorite fact. Consumption makes up roughly 2/3 of the US GDP. Consumption, in case you didn’t read it here at least 1000 times, is the stuff you and I buy (goods and services). As long as we keep spending a bit more each year, GDP can continue to grow at a healthy pace. Oh, and the companies we spend our money at can remain healthy and grow at a respectable enough pace to keep their stocks going higher. Yes folks, it really IS that simple.

Recession is just a word, and to be honest with you, there is a bit of mystery around exactly how the National Bureau of Economic Research (NBER) declares an “official” recession. Obviously, it starts with GDP contraction, but there are a number of other things that NBER considers before awarding the not-so-coveted title. If no one ever told you that the country was in a recession (we are not), you probably wouldn’t change any of your daily habits. HOWEVER, if while filling your water bottle in the breakroom at work, you overheard colleagues talking about possible job cuts, you would probably… after going back to your cubicle and breathing through a panic attack, think twice about booking that vacation to the Grand Canyon. In fact, going forward you would probably cut back on your spending, just in case you find yourself unemployed. Your confidence as a consumer would be eroded, and you would likely spend less money in the months ahead. Can you see this clearly? That is why, if I am wondering about economic health over the next year, I turn to consumer confidence indicators as leading indicators of consumption. Consumption is literally the “C” in the economic formula GDP = C + I + G + (X – M). Yes, it’s that important! You spend less and GDP growth declines; you spend less because you are losing confidence.

There are two principal indicators of consumer confidence that are released each month, one from the Conference Board and one from the University of Michigan. Both are based on surveys of consumers’ feelings on economic health today, the future, and inflation. Yesterday, we got the Conference Board’s Consumer Confidence number which declined when economists were expecting it to have increased. And it wasn’t a small decline. It was the largest monthly decline in three years. You may have seen the headlines. It is kind of ominous sounding, but to be clear, the actual number is within its three-year range… admittedly, at the low end, though.

What is the root of the drop? Well, looking at the survey we note a decrease in the measure Jobs Are Plentiful and an increase in the Jobs Are Hard To Get measure. In line with that, respondents expect fewer available jobs in 6 months. If you have been following me, it makes sense that any good measure of confidence takes into account consumers’ expectations about employment. This does not mean that the employment situation in the US will, indeed, get worse. The important revelation is that consumers EXPECT it to, and that expectation will affect their propensity to spend money. In fact, it doesn’t even matter WHY consumers are worried about their jobs, just that their anxiety is increasing.

In case you were wondering, yesterday’s release also breaks down confidence by region. It turns out that the Pacific region is the most confident of the bunch and the Middle Atlantic the least. The survey also asks about purchase plans in the coming six months. Plans to buy New Automobiles, New Homes, and Refrigerators have all increased from August to September… despite lower confidence. Hmm, what can we make of this? Well, a positive economic spin is that consumers will just continue to keep the economy propped up while complaining how bad things are. A negative spin is that if, indeed, the economic situation does take a turn for the worse, the pain will be… um, painful. Yesterday’s number was not good, but it is consistent with what the Fed is focused on at this point, the labor market. Neither the slightly higher unemployment rate nor decreasing confidence in the labor market have hit the point where experts need to be called in, but they can change on a dime, so the message here is, don’t lose focus because ALL is not well.

YESTERDAY’S MARKETS

NEXT UP

• New Home Sales (August) may have slipped by -5.3% after climbing by +10.6% in July.
• Fed Governor Adriana Kugler will speak today.
• Overnight WHILE YOU SLEPT the PBOC (Chinese Central Bank) cut short-term interest rates by a record amount. It will likely be a topic of discussion in today’s session.
• After the closing bell, Micron Technologies and Jefferies Financial will announce earnings.

DOWNLOAD MY DAILY CHARTBOOK HERE 📊