One of the defining features of 2019 has been the remarkable resilience of the consumer in the face of gale-force economic headwinds and widespread confusion about anything and everything, up to and including whether the United States will still be a democracy two years from now (and we say that only half-jokingly).
Despite a demonstrable downturn in global manufacturing, rampant geopolitical uncertainty and the seemingly intractable trade war, consumers have generally hung in there, rolling with the proverbial punches.
That is a mirror image of the services sector and, ultimately, the labor market. Even in economies where the bottom has fallen out completely for manufacturing, services has yet to roll over in earnest. Germany is the quintessential example:
Eventually, one would assume that somebody has to be “wrong”. Either the factory malaise catalyzed by trade tensions and widespread angst around the myriad geopolitical earthquakes that continue to reverberate across the global economy spills over into services, leading finally to a spike in joblessness, or else manufacturing inflects for the better, perhaps on the back of central bank easing which, as Jerome Powell reiterated on Wednesday, works on a lag.
Indeed, the following visual (which we’ve used before) argues that the global manufacturing PMI may have bottomed.
Another way to visualize the “somebody has to be wrong” story is to juxtapose plunging CEO confidence (and we talked about the reasons behind that here) with consumer confidence.
Have a look at the following two visuals from a Goldman note dated Thursday. The chart headers speak for themselves:
That’s pretty remarkable.
“The dichotomy for a long time has been that manufacturing and corporate confidence has been unusually weak while consumer confidence has been rather robust”, Goldman writes, adding that this is largely a function of “falling unemployment and, in the case of the US, very low unemployment”.
And so, we’re left with another “jaws” scenario (i.e., how will the yawning disconnects – the jaws – shown in exhibits 7 and 8 above resolve themselves?).
Will consumer confidence catch “down” to what will, in hindsight, be seen as the “reality” reflected in CEO confidence and manufacturing surveys? Or will business investment, manufacturing and corporate sentiment eventually realize things aren’t all that bad?
Nobody really knows just yet. “In the US and in many other regions, wages are now rising and consumers have benefited from mortgage refinancing and, importantly, household savings rates remain strong”, Goldman goes on to write, on the way to expressing a glass-half-full take on things. “With some stabilization of growth data and moderation of trade risks, the chances of manufacturing rising to close the gap, rather than consumption falling, have started to look more probable”, the bank says.