Things are looking up for a certain segment of US consumers, but more widespread progress hinges on the pace of the jobs recovery.
Intuitively, consumer sentiment tends to be closely tied to the job market. When the employment picture is improving, consumers are more confident that the economy is on the right track and therefore they’re more likely to spend. Sounds simple enough, right? But when there are mixed signals or sudden bouts of weakness in employment, confidence takes a hit and market watchers start to question the staying power of progress. (That relationship has become even more pronounced since the Federal Reserve has focused its monetary policy so heavily on employment.)
For example, several weeks ago the December jobs report surprised investors, revealing that far fewer jobs were created than expected. Since then, they’ve been searching for evidence to either negate or confirm the job numbers and to assess the state of the consumer. We’ve been keeping score too. Here’s what we found.
1 The consumer’s outlook for the future needs to improve.
Sentiment, as measured by the University of Michigan and Thomson Reuters, has declined slightly but remains close to post-budget-crisis highs. However, the expectations component of its index, at 70.9, remains well below the 80 level that is generally considered consistent with solid economic growth. To put that number in context, expectations were much lower at 58.4 in January 1979, and again in January 2009 at 57.8. However, in normal periods of economic growth, it’s been well over 80.
2 The employment situation is improving—albeit slowly—and people seem to be slightly more positive about job growth.
Last week’s Fed Beige Book indicated that most districts are seeing an increase in hiring, most notably Richmond, Va. Meanwhile, the Job Openings and Labor Turnover Survey released on Jan. 17 showed that job openings rose more than expected in November. One caveat is that the hiring rate remains low relative to levels seen in the last business cycle expansion. Still, the quit rate slightly increased, which could be the result of improved confidence in the job market. In other words, people are willing to voluntarily leave a job because they’re confident they can find a new one.
3 Consumers haven’t been deterred by the rise in mortgage rates.
And they’re benefiting from what seems to be a loosening of credit standards. Last week, we saw double-digit increases in both purchase mortgage applications, up 12%, and refinance applications, up 11%. According to Ellie Mae, the average credit score for approved mortgages in December was 727, well below the December 2012 average of 748.
“Consumers haven’t been deterred by the rise in mortgage rates.”
4 Some consumers have participated more fully in the recovery than others.
That appears to be impacting their spending. Survey administrators for the University of Michigan/Thomson Reuters consumer sentiment survey attributed the drop in sentiment largely to lower- and middle-income consumers who had concerns about economic growth. Specifically, pollsters cited "lackluster growth in employment and income, and anticipated less improvement in long-term prospects for the economy." Conversely, upper-income households benefited from “continued strong gains in income and increases in stock and home prices.”
Separately, an October survey from Goldman Sachs showed a large and growing chasm between higher-income and lower-income consumers. Goldman Sachs found that those consumers in $90,000-plus income households became more optimistic, while consumers in under-$50,000 income households became more pessimistic. This diverging sentiment has translated into distinct spending patterns, with higher-income households spending more in the third quarter than in the second quarter, while consumers in lower-income households decreased their quarterly spending.
In short, it seems like the jobs report was an anomaly. But that doesn’t mean the consumer is entirely healthy. As I’ve noted in The Upshot previously, the employment situation is certainly improving but it has a long way to go before returning to a more normal level. We will be looking to the January employment report to help fill in the jobs picture and to give a more complete view of the state of the consumer.
Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors.She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Purchasing Managers’ Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. The Chicago-PMI survey registers manufacturing and non-manufacturing activity in the Chicago region. Investors care about this indicator because the Chicago region somewhat mirrors the nation in its distribution of manufacturing and non-manufacturing activity.
Thomson Reuters/University of Michigan Surveys of Consumers is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 in December 1964. At least 500 telephone interviews are conducted each month of a continental United States sample (Alaska and Hawaii are excluded). Five core questions are asked.
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