Anticipating the Impact of Consumer Confidence on Market Dynamics | Episode 131 | 05-10-24

In this episode we discuss the complexities of consumer confidence and its profound impact on the economy and dissect recent trends highlighted in the University of Michigan Consumer Confidence Survey, as well as how these trends may predict future spending patterns. The crux of the discussion lies in the correlation between consumer sentiments, inflation expectations, and their consequent effect on market dynamics.

Megan starts by addressing the recent unsettling dip in consumer confidence, noting that it has reached a six-month low. This decrease has been most significant in consumers' expectations for the economy's future, marking the most considerable monthly decline since June of 2022. Such pessimism, particularly regarding the labor market—with a 40% segment anticipating an unemployment rate rise—could herald changes in consumer behavior and spending.

The episode touches on the disconnect between consumer expectations and market predictions, particularly concerning interest rates. While only a quarter of surveyed individuals foresee a drop in interest rates, markets have priced in at least one rate cut. This disparity invites listeners to ponder the potential for unforeseen market responses and the importance of aligning consumer outlook with economic forecasts.

A significant focus of the discussion revolves around inflation expectations and their potential to incite anticipatory spending. With consumers bracing for higher prices, there is a concern that this behavior could fuel inflation further. The survey indicates that inflation expectations for the coming year have surged to 3.5%, reaching another six-month high. Long-term expectations have also risen, suggesting that consumers do not anticipate a reprieve in rising prices anytime soon.

The upcoming week will be packed with pivotal economic data releases such as CPI, PPI, retail sales, and housing data. These reports will be instrumental in understanding the broader economic landscape and the possible ripple effects of shifting consumer moods.

Another disappointing economic report, and the market really does not seem to care too much about it. I'm Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. I'm coming to you today with our regular segment of Markets with Megan. It is Friday, may 10th, and we got the preliminary reading on the University of Michigan Consumer Confidence Survey this morning. Unfortunately, this survey, it looks at the broad sentiment, but then it also breaks it out into two different categories the consumer sentiment on both the current conditions and then future expectations for the economy. All three of these actually declined much more than expected and all three are now sitting at a six-month low. If you look at the index, that's for future expectations on the economy, that actually saw its biggest decline monthly decline since June of 2022. 40% of those people surveyed are worried about the labor market and they expect the unemployment rate to rise over the next year. That was compared to 32% in prior months. And then, when looking at interest rates, only 25% of those surveyed think that interest rates will fall in the year ahead and this is contrary to what the market is pricing in. At least one rate cut this year. That was compared to 32% in April. So consumers are getting much more nervous. This typically is a leading indicator for spending. So we'll get some more information next week on retail sales to see if this is filtering into how consumers are spending.

But what is more important in this report is the inflation expectations from consumers. We look at inflation in a lot of different ways. We look at it at headline consumer price index, producer price index, the Fed's PCE index that they like to look at. But if you have consumers that are thinking that prices are going to be higher in the future, what happens is that can be even more inflationary because they'll spend now with the anticipation that prices will be higher in the future. And what does that do? Just fuels inflation. So this index also in the survey they survey what the expectations for inflation are in the next year and then also in the next five to 10 years.

The expectations for consumers it's actually been increasing for the past two months but it jumped up much more than expected to 3.5% Again. That's also a six-month high and then the five to 10-year inflation. This tends to be relatively well anchored. That also has increased now for two months and that's 3.1%. So consumers don't think prices are getting any better. Their sentiment is declining and most likely, this is going to filter into the economic data in the second quarter. Now, we'll be back next week. There's a lot of economic data, so you'll be seeing a lot of me next week. We'll get two of the big inflation readings CPI and PPI. I mentioned retail sales that we'll get, and we will also get some housing data. So we'll be back next week. Have a wonderful weekend and if you have any questions or comments, please feel free to reach out to podcast at Verdence. com. Thank you.