Consumer confidence indicators in the US, Eurozone, and UK point to grim days ahead
Consumer confidence indicators in the US, Eurozone and UK have never been lower (see charts below) and portend weakness in spending. The question is not whether consumer spending will soon collapse but, in light of these grim readings, how can it not?
As I have argued recently, consumer spending tends to be resilient...up to the point when it is no longer able to be. Economic trends such as spending are often nonlinear - they hit tipping points at which what had been changing gradually abruptly accelerates.
In his book The Tipping Point, Malcolm Gladwell provides some examples to illustrate the phenomenon. Three examples of tipping points he gives, outside the realm of economics, are Baltimore's syphilis epidemic, the resurgence of Hush Puppies, and school shootings.
In relation to consumer spending, a sudden deterioration can occur when corporate profits start to fall, companies are compelled start laying off workers, credit cards getting maxed out etc. As a result of these developments, fear starts to spread, causing wider declines in spending, further lay offs, and a further downward spiral.
For investors, what ultimately matters is how financial markets will behave in the face of changing economic performance.
Financial markets do not appear to be expecting a precipitous fall in consumer spending. Bond yields are off only slightly from their highs and equity market declines this year have been gentle in relation to what would normally be expected from or ahead of a recession associated with a significant decline in consumer spending.
Since financial markets are generally very efficient at discounting information such as that embedded in the consumer confidence indicators, I must wonder whether it is I or the markets that is missing something.
Exhibit A: 1972-4
The University of Michigan Consumer sentiment index fell significantly throughout 1972 and in early 1973 but the stock market only fell sharply in Q2 and Q3 of 1974.
Exhibit B: 2007-8
The University of Michigan Consumer sentiment index fell significantly during 2007 and the first half of 2008 but the stock market only fell sharply in the final quarter of 2008.
There are some counter examples but my aim was to show that the markets are sometimes inefficient, not always. It is possible that somehow or other the utterly awful consumer confidence indicators across the US, the Eurozone and UK are not a portent of weakness ahead in consumer spending and equity markets. I just think there is a significant risk this is not the case.
Chart 1: US Consumer Sentiment Index
Source: University of Michigan
Chart 2: Eurozone Consumer Confidence
Source: The European Commission
Chart 3: UK Consumer Confidence
Source: GfK, Refinitiv, FT
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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