It has long been said that the consumer makes up 70% of the economy, but only someone with no life would ever bother to fact check such a statement.
I was thinking about the U.S. Consumer recently. What prompted my thinking was data from the University of Michigan Survey of Consumers - a great source of useful information, if you’re of the disposition. I noted that there was a sharp drop in Consumer Sentiment in August (that’ll be 2021 for people who discover this post years hence😉).
‘Oooh!’, I thought (yes, that sort of thing really does go through my mind). That’s telling - or maybe not, as Consumer Sentiment can be a volatile series. Perhaps it’s just a reaction to the current spike in inflation? But perhaps not.
As I said, the UoM survey is a great source of useful data. So, inspired by this most recent drop in consumer sentiment, I updated a few of my charts. Here’s a sample …
Consumer Sentiment can be a useful guide to GDP
Similarly, it can be a guide for stock market performance
Both of the above appear to suggest that the surge in economic activity and stocks seem to be getting a little carried away. Nevertheless, it could be that it’s consumer sentiment that is a little down at present.
Let’s have a look at a few other gems from the UoM data.
Consumer expectations in relation to the stock market has been a useful guide in times past
On the economic front, Consumer willingness to contemplate purchasing large household items has foreshadowed U.S. Unemployment
It would appear that the U.S. Consumer is something of a playa when it comes to forecasting the economy!1 But as for that 70% thing? We’ll see.
Hmm, speaking of U.S. Unemployment, that reminds me …
The Unemployment rate has precognition of stock market returns, and over an extended timeframe.
Yes, very interesting, but let’s get back to the Consumer.
It would appear that the U.S. Consumer is not quite at the 70% that urban legend ascribes. Almost. 69% (stop giggling) is the current level and the highest they have ever been (at least, in the data that I have access to).
It is quite likely that this will be the high for the foreseeable future too. The current spike in the Consumer’s share of the economy looks increasingly like a one-off rather than a new trend. I say this based on Household Debt, which peaked at the GFC and has been in steady decline since (as a percentage of GDP).
To me, the current spike in consumption reflects a diversion of saved funds away from planned international travel that is no longer going to happen (which I wrote about here), and possibly some retirement splurging (read my other recent posts on employment, labor shortages & demographics etc. for my rationale). Interestingly, items that cost about the same amount of money that it takes to have a decent foreign sojourn, and the sort of things that recently retired people buy to see them through their twilight years, meet at approximately the same price point:
home improvement & renovations;
investment property deposits;
new or used vehicles;
large household goods etc.
In other words, the areas where there has been significant inflation.
The expectation that the Consumer will ride to the rescue of the economy will turn out to be a major disappointment as the Consumer rides straight on by and off into the sunset. Because, while Household Debt as a percentage of GDP has fallen, Household Debt as a percentage of Personal Consumption has risen.
Why would this be? Well, it would seem that the Consumer realized that they’re not getting any younger and they needed to invest for their retirement, which they had neglected for so long. There was some serious catching up to do. Thankfully for these people, the Fed has done everything in its power to ensure that a generation has the wherewithal to enjoy their latter years.
This must be a kick in the teeth to those who believe in the “If they borrow, they will spend” mantra (i.e. the Fed and the Treasury et al.).
So, it turns out that the supply side theory and its trickle down ethos that undergirds our financial policy framework is misplaced2 because Consumers ultimately possess a sense of fiscal prudence. Something that our economic overlords could learn from.