US consumers have a “super bad feeling” (to quote Elon Musk) about the short-term outlook for the economy.
Although an abundance of jobs buoyed the Conference Board’s present situation gauge, perceptions of current business conditions actually worsened this month, and Americans harbor an overtly dour view on the future.
The expectations index dropped to just 69.7 (from 76 in January), far short of the 80 demarcation line seen as a recession barometer. Anything below 80 has historically signaled a downturn, and the expectations index has printed below that threshold for 11 of the last 12 months.
Thanks to the drop in expectations, the headline index missed the lowest estimate from nearly five-dozen economists. The range was 105.4 to 112.4. The actual print was 102.9.
It was the second straight monthly drop for the Conference Board’s index, setting up an ostensible contrast with University of Michigan sentiment, which has ticked higher of late.
And yet, recall that the Michigan gauge remains some 20 points below its historical average, and was recently bolstered by consumers with “large stock holdings.” That cohort might be feeling a bit less optimistic now that 2023’s equity rally is losing steam.
“The proportion of consumers saying jobs are ‘plentiful’ climbed to 52% — back to levels seen in the spring of last year,” Ataman Ozyildirim, senior economics director at The Conference Board, said Tuesday, before cautioning that “the outlook appears considerably more pessimistic looking ahead [as] expectations for where jobs, incomes and business conditions are headed over the next six months all fell sharply in February.”
So, basically, consumers expect a recession, although you certainly wouldn’t know it from how they spent money in January. On that score, Ozyildirim said Americans “may be showing early signs” of fatigue as still-high prices and ever higher interest rates sap confidence and erode spending power. Plans for large purchases including homes, cars and major appliances moderated this month, as did vacation intentions.
And yet, even if consumers are finally inclined to retrench+, I’d note that economists have been predicting as much for the better part of a year, only to see consumers defy the odds again and again, presumably via some combination of credit card debt, home equity loans and whatever’s left of pandemic savings buffers.
Remember: Credit card debt is rising faster than inflation, and variable rates are near 20%, with more Fed hikes on the horizon.
How long all of this can continue is the $26 trillion (or $20 trillion if you prefer real terms) question.
When it comes to answers, we’re all guessing. And your guess is just as good (or, perhaps more aptly, just as bad) as mine or anyone else’s.
Isn’t this kind of the nature of entrenched inflation? Consumers have every incentive to spend now instead of spending more later.
Consumers with cash to spend can certainly “stock up today” and “save” to get ahead of higher prices down the road.
However, the math does not work for vert lobg if it is credit debt at 20%.
Good point Rotund Moose.
A related point: some commentators like to point at how much credit card “borrowing power” is still untapped, arguing that this will support consumer spending further. I have over $100k in unused borrowing capacity which I hope we will never use. But that shows up in the aggregate unused credit statistics. How much of the referenced unused credit is in the hands of those who are unlikely to actually use it?
Many people are impacted, I’m sure. But they’re not the majority. And the rest of us are making up the difference. What we’re seeing is the “wealth effect” in action, I reckon. I’d also suggest the wealth effect is affecting the broader perception of inflation and recession.
I’m a clear example. As for the question of feeling a recession coming, the question for me is how it affects my approach to investing. Generally, slow-downs in the economy suggest a forthcoming investment opportunity. And portfolios are adjusted to abide in a downturn.
On the face of it, I imagine we’ll see a quarter or two (maybe three) of lower earnings and resetting expectations. January 2024 could yield a market turnaround. Or we may see a longer term downturn.
I am anxious to see how this downturn plays out. But it’s too early to call. I do not buy the idea that we’re in state of entrenched inflation. I think consumers are spending because they have money and enough of them are not being impacted by the downturn. But there is a downturn. And I sincerely doubt the Fed will abide with the idea of entrenched inflation.
There will be a reckoning of some sort. We are definitely starting to feel the effects of a shrinking economy. How far it will go, I do not know. One difference (in my thinking anyway) in the current environment is a question about the “wealth effect” being a bit of a buffer to impacts on spending and the likelihood of an actual recession. Recession still doesn’t seem to be a certainty, but it does seem to be growing more likely as the months pass. Kind of like watching a slow train wreck.
A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth mean recession.
By NBER’s definition, a downturn must be deep, pervasive, and lasting to qualify as a recession.
Currently, inflation is running at greater than 5% and does not look like it is set to decrease anytime soon. While GDP growth is certainly not anywhere near 5%. So (real) GDP growth is in fact contracting.
In reality, are we not already in a recession if nominal GDP is substantially below inflation? And certainly this measure does not seem appropriate during periods when inflation is running hot.