The uncertainty of the US consumer
Last Tuesday, The Conference Board released its reading of consumer confidence for April, which showed another drop—continuing a trend we have seen for several months now. Interestingly, weakness was centered in the expectations sub-component, which saw the lowest score in more than two years.
Drilling down, even though consumers are positive about the current employment situation, they appear concerned about the outlook for jobs: 17.2% of those surveyed expect fewer jobs six months from now, while only 12.2% expect more jobs in six months. While more of those surveyed expect higher income in six months than those who don’t, the gap is smaller.
Last Friday, we received further confirmation of a weakening consumer. The University of Michigan/Thomson Reuters consumer sentiment index for April fell to 89.0 from 91.0 in March—also part of a multi-month downward trend. Weakness is again centered on the near-term outlook where the expectations component dropped substantially for the month. This decline underscores concerns about jobs and income in the near future—despite positive sentiment about the current environment.
Why such negative sentiment?
So how can we explain this negative sentiment about the future? One clue is included in the consumer sentiment report: People think the job situation will get worse, not better. One can assume that those surveyed must expect overall economic conditions to deteriorate. And these consumers may be onto something: The Index of Leading Economic Indicators 6-month rolling average points to a slowing rate of growth over the next six months.
The US presidential race could also be a contributing factor. After all, this campaign season has taken many unexpected twists and turns. And while there may be less uncertainty about which candidates will be nominated by their respective parties, there is arguably more uncertainty than ever about their platforms and what, if anything, they will be able to accomplish with Congress.
We also can’t ignore campaign rhetoric, which has largely emphasized US weaknesses, including the poor economic growth environment, the inequality of our economic system and so on. Also driving down consumer confidence could be continued financial repression; with interest rates so low, the growing number of Americans in retirement are drawing paltry amounts from savings accounts, money market funds and other popular investment vehicles perceived to be less risky. Finally, negative sentiment could also be the result of greater fear of terrorist attacks given recent tragedies in Europe and elsewhere.
Inflation and interest-rate fears
Another reason for a drop in confidence could be the view by many consumers that prices will go higher, particularly on items such as gasoline. In the University of Michigan reading we saw that while five-year inflation expectations are down 0.2% to 2.5%, one-year inflation expectations are actually up 0.1% to 2.8%. One reason Americans have been able to tolerate low wage growth is that inflation has been low; any increase in prices could constrict them.
Or could it just be expectations of higher interest rates, particularly mortgage rates. After all, The Conference Board confidence index found that consumer buying plans, while lower across the board, are especially so when it comes to housing. It will be important to follow housing market data closely as spring is an important sales season.
Jobs report to provide further clues
In short, it is hard to discern why consumers are growing negative on the economic outlook, but there is no shortage of possible reasons given the economic, political and monetary-policy environment. Consumer confidence is a critical issue given that consumption is about 70% of GDP. So if consumption is weak, it could drag down overall GDP growth despite relatively low oil prices and high employment levels.
The real question is whether the decline in consumer confidence is a temporary blip or an early indication of significant trouble ahead. We think it will likely be the former rather than the latter, although we will continue to follow the situation closely. In the coming week we will pay particular attention to the April jobs report and consumer credit. These will provide additional clues as to the health of the US consumer.
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About the Author
Kristina Hooper is the US Investment Strategist and Head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
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