After successfully resisting a recession for a more extended period than many anticipated, American consumers are now on the verge of succumbing, as indicated by the most recent survey in Bloomberg’s Markets Live Pulse.
Out of the 526 American consumers surveyed, over half believed that personal consumption, which acts as a crucial catalyst for economic growth, is poised to contract in early 2024. This would mark the initial quarterly contraction since the pandemic’s outset.
An additional 21% of respondents suggested that this turnaround could occur even earlier, during the final quarter of this year. They attribute this shift to elevated borrowing costs, putting pressure on household finances and the gradual depletion of savings accrued during the COVID era.
These findings about American consumers contradict the prevailing optimism that has characterized the stock markets throughout most of the summer. This optimism was fueled by decreasing inflation rates and low unemployment figures, fostering expectations of a “soft landing.”
However, the economy could cease growing if American consumers’ spending contracts. It could result in further declines in stock prices. Stocks have already retreated from their peak levels in late July.
The US Economy is not slowing down
Alec Young, the chief investment strategist at MAPsignals, highlights that the market’s ascent has been largely driven by the anticipated occurrence of a soft landing, declining inflation, the cessation of Federal Reserve tightening, a peak in interest rates, and stability in the dollar and oil prices. However, should the market’s confidence in this scenario waver, it could expose stocks to potential vulnerabilities.
At present, it seems that the US economy is not slowing down but rather gaining momentum. Projections indicate that growth is expected to accelerate in the third quarter, primarily due to a recent surge in household spending. Household spending significantly increased in July, marking the most substantial growth in six months.
Surge in Consumption in questions
The major question at hand is “whether this surge in consumption can be maintained?” says Anna Wong, Chief US Economist at Bloomberg Economics, who anticipates a recession beginning by the end of the year. “It’s not sustainable because it’s driven by specific, one-off factors,” with the summer’s lavish spending on blockbuster movies and concert tours being notable examples.
The resilience of the US job market has bolstered household spending despite the most substantial price hikes in decades. This has caused some analysts to extend their projections for a recession or even abandon them entirely.
Economists at Goldman Sachs Group Inc. are optimistic that American consumers will continue to perform well in 2024, aiding in sustained economic growth. They base this outlook on steady job growth and wage increases that surpass inflation.
However, researchers at the Federal Reserve Bank of San Francisco hold a different view, indicating that the excess savings that have helped American consumers weather the price surge will likely deplete in the current quarter. This sentiment aligns with the opinion of three-quarters of the respondents in the MLIV Pulse survey.
Thomas Simons, Jefferies’ US economist, highlights the growing struggle among lower-income and less-wealthy American consumers due to the accumulated inflation of the past few years. In contrast, wealthier individuals are still shielded by their savings and asset appreciation. While these consumers have managed to cope with higher prices collectively, there may come a point where this becomes unsustainable.
Delinquencies are on rise
Delinquency rates on credit cards and auto loans are rising, putting financial strain on households following the Federal Reserve’s interest rate increase of more than 5 percentage points.
In addition, another form of debt, student loans, is about to become due again for millions of Americans who benefited from the pandemic-related freeze on repayments.
Approximately three-quarters of the survey respondents expressed concerns about auto and retail stocks being vulnerable due to decreasing excess savings and stricter consumer credit. Notably, this concern is not fully reflected in market prices, as General Motors Co. and Ford Motor Co. have not experienced the same level of stock market gains as Tesla Inc., which has more than doubled in value this year.
Investors are relying on unconventional indicators
Investors are searching for indicators to predict the future actions of American consumers, as the economy’s trajectory relies heavily on their behavior.
The MLIV Pulse survey indicates that most investors see the diminishing availability and increasing cost of credit, including high mortgage rates, as the most significant challenge for consumers in the upcoming months.
In response, MLIV Pulse respondents have identified various leading indicators, ranging from traditional metrics like retail sales and credit-card delinquencies to unconventional ones such as airline bookings, pet adoptions, and using “Buy Now Pay Later” installment plans. The volatility of recent years has made traditional economic guides less reliable.
According to Keith Lerner, co-chief investment officer at Truist Wealth, the usual playbook for the economy and markets is being challenged in this post-pandemic environment, with developments taking longer to unfold.