If the US consumer could be taken as a barometer for global economic health, economists might be feeling a little less gloomy as US consumer sentiment ticked gently higher from record lows earlier this year.
Lower gas prices have put more money back in household budgets and the tiniest of springs in consumers’ steps. But is this creating a false impression of economic strength?
The US consumer has historically been a swing factor in global economic health. Consumer spending contributes almost 70% of US GDP and has helped drive economic recovery to date. Given the importance of the US to global economic growth, a strong US consumer could be an indicator of global economic resilience.
The most recent reading for consumer confidence from the University of Michigan shows sentiment above expectations and moving higher. Expectations of household inflation had fallen as oil prices have dropped.
At the same time, jobs growth continues at pace. The most recent data showed the US economy added 315,000 jobs in August, lower than July’s blowout figure of 526,000, but still significant.
US consumer not out of the woods yet
Gavin Haynes, investment consultant at Fairview Investing, says: “Employment is still high and wage growth has been very strong.”
He adds that the weakening oil price is also helping to support the consumer in the US. “This is such a big part of US spending. It can be a major barometer of what is happening over the next six to 12 months.”
However, he says the market will be watching the emerging employment figures to judge the effect on the consumer. “At the moment, they are willing to spend, but if jobs growth weakens, consumer sectors could get hit again – people will become more concerned about their household incomes and rein in spending.”
Caroline Shaw (pictured), multi-asset portfolio manager at Fidelity, also sees some potential weakness ahead: “The labour market is still fairly robust. However, the US may well slip into recession in the next 12 months as well. Consumer confidence has been very low and inflation is still very high. The Fed looks set on keeping rates high until inflation is tamed.”
Confidence is weak everywhere else
It is also clear that consumers in the rest of the world are unlikely to step in to fill any gap if the US consumer starts to weaken. In China, for example, the property sector is still weighing on sentiment, while sporadic lockdowns are interrupting economic activity.
Everywhere, inflation is hurting household spending and eroding any savings war chest built up during the pandemic.
Shaw adds: “In Europe and the UK, consumers are facing a tough winter. Energy prices have reached never-seen-before highs. Gas prices are some 15x higher than their pre-pandemic levels. This will have a material impact on disposable incomes, incomes that on a real (inflation adjusted basis) have already been on a declining trajectory, not just in Europe but pretty much everywhere.
“Europe and the UK look odds on to go into recession in the near future, but central banks are under pressure to keep raising rates to tackle high inflation. Some government support may well arrive but will not be enough to fully offset the hit to consumers.”
Consumer sentiment indicators in both the UK and Europe are weak. In the UK, the GFK Consumer Confidence index reported its lowest level since records began in 1974. In a single year, the index has gone from +3 to -44 in response to cost of living concerns.
Eurozone consumers are at their gloomiest on record. A European Commission survey showed households’ assessment of their past and future financial situation was very weak.
In both the UK and Europe, employment data is holding up, but corporates are starting to cut back on their hiring plans.
Stock winners and losers
This weakness continues to be reflected in markets. While global consumer discretionary stocks rallied in August when it looks like the Fed may pause rate rises, they have subsequently fallen again. The MSCI UK Consumer Discretionary Index is down 9% for the year to date, compared to a rise of 5.3% for the wider MSCI United Kingdom index.
Haynes says consumers are likely to get poorer in the months ahead and it is difficult to see a good outcome for consumer discretionary or travel and leisure stocks with this backdrop.
Shaw also has an unfavourable view, particularly in the US: “The US consumer discretionary sector is heavily weighted towards goods, but consumption has switched away from goods and towards services since the Covid reopening.
“Inflation might have peaked but it is still high and unlikely to fall quickly. The US may well be heading for a recession, which would further reduce demand for discretionary purchases. Finally, the sector is expensive, especially given the poor outlook for consumers.”
However, she is marginally more positive on the US consumer staples sector, which is often defensive so should provide some resilience in the event that growth slows further.
She adds: “On the negative side, high inventories are weighing on some retailers pricing power, a significant factor in a high inflation regime. In addition, the sector is very expensive – forward PE multiples are at their 98th percentile versus history.”
It is difficult to see an imminent turnaround for consumers, and across the globe, household finances are likely to get worse before they get better. This is likely to weigh on the global economy and there will be little respite for hard-hit consumer stocks. If anything, given current valuations, it may have further to fall.
