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The ongoing US-China trade tensions and stock market volatility are unnerving consumers and stoking fears that the US economy will slow down dramatically from current levels and potentially lapse into a recession next year.

While these and other macroeconomic forces merit a more cautious approach in financial and investment decisions, our data continues to describe a relatively strong consumer environment supported by favorable conditions in the labor market and positive trends for interest rates and inflation.

 
 

Consumer Spending is Healthy, Though Momentum Decelerates on Trade, Market Concerns

 
 

Consumer spending growth remains positive for August with 29% of respondents saying they plan to spend more over the next 90 days and 19% saying less. Despite the relatively upbeat reading, this is down a net 5-points compared to last August.

Although the data continues to reflect stability in the consumer outlook and may only be reflecting a seasonal slowdown, it’s a notable decline from last year, prompting us to recommend that consumers and businesses recalibrate for the increasing potential of economic risk.

 
 
Overall Consumer Spending - Last 3 Years Comparison
 
 

In a broader context, deceleration in the consumer spending growth-rate does not in itself predict an oncoming recession. We typically see a slowing in overall consumer spending plans in the latter part of the year before it gains momentum in the new year.

Rather, a steady decline into negative territory, accelerating as it goes lower, would be more indicative of a potentially damaging economic crisis and give us reason to assess whether an onset of a recession was imminent.

To better understand recessionary conditions, it’s instructive to review our data from 2008. At the time, the negative level in August 2008 (net -20) – 30 points worse than the current number – was a point in the trend between the official start of the recession (January 2008) and the GDP bottom in Q2 2009).

Over the last decade we’ve seen single data points that have registered negatively, such as January 2019 (net -6), but those are mostly emotion-driven reactions to specific events with minimally lasting effects

We’ve also seen longer stretches in negative territory such as the period from September 2015 to May 2016. With an average reading of only net -4, that downturn never compounded and was instead part of the ebb and flow of one of the weakest recoveries on the books.

For additional insight into the factors weighing on consumers’ sentiment and behavior, we asked about the macroeconomic forces posing the greatest threat to personal finances. The two main threats continue to be trade war/tariffs (47%) and US stock market performance (42%), with concern over both increasing since the last month.

 
 
Threats to Personal Finances
 
 

Interestingly, worries have increased across all income levels with the largest coming from higher income households (>$125,000) with regards to the impact of trade wars/tariffs (48%; up 7-points) and lower income households (<$125,000) with regards to the impact of US stock market performance (41%; up 9-points).

This is happening despite the fact that rising tariffs – and thus higher consumer prices – generally impact lower income households more severely, while falling stock prices strike those with the most invested in the market. This suggests that the risks in the current macroeconomic environment are pervasive and if they are not adequately addressed through policy and other measures, could lead to worse readings in the months ahead.

Notably, lower income households are being squeezed more by threats that increase their costs of living compared to higher income households: US inflation (16% to 8%), energy prices (12% to 8%), US dollar exchange rates (10% to 5%) and environmental regulations (8% to 4%).

For years, the 451 Alliance has tracked consumers’ sensitivity to price. While overall cost of living expenses remains relatively tame, any sustained increase will have a more adverse impact on the economy and consumer spending.

 
 

Sentiment Driven by Volatile Economic Narratives

 
 

In addition to topline spending growth, we also see a negative impact on consumer confidence in the overall direction of the economy and investor confidence in the stock market.

Sentiment indicators based on a single question are subject to periodic bouts of severe volatility. When these two metrics – consumer expectations and stock market confidence – reach extreme levels, they have demonstrated their highest value as contrarian indicators for shifts in the rate of economic growth and the outlook for equities prices.

 
 

Consumer Expectations

 
 

Consumer expectations for the overall direction of the economy have been volatile the past three months. Currently, 29% of respondents expect the economy to worsen over the next 90 days and only 17% saying they expect it to improve. These findings are a net 14-points below our June reading and 19-points worse than last year.

 
 
Consumer Expectations - Last 3 Years Comparison
 
 

Stock Market Confidence

 
 

Similarly, confidence in the US stock market is also swinging back and forth, as investors have been subjected to almost daily crosscurrents in various narratives about the Federal Reserve, trade, and the global economy.

As a result, one-half (50%) of respondents say they are less confident in the US stock market with only 6% saying more confident – a net 40-points worse than previously and 28-points worse than last year.

 
 
Consumer Confidence in US Stock Market - Last 3 Years Comparison
 
 

Both of these sentiment indicators are heavily influenced by the daily onslaught of political, economic and financial news. Thus, they swing with the positivity or negativity of the 24-hour news cycle. What’s been most striking is their unpredictability, especially in comparison to the relative steadiness of consumer spending.

Together, these sentiment indicators provide a monthly pulse of consumers’ emotional temperature – and it’s apparent the August slides are repercussions of zig-zag messaging on the US-China trade dispute and erratic, algorithm-driven trading in stocks.

 
 

Restaurants, Travel Signal Discretionary Spending Pullback

 
 

When asked about specific categories, respondents say they plan to reduce spending the most on travel/vacation (-3) and restaurants/everyday entertainment (-3).

While it is concerning to see reduced outlays for major pieces of discretionary spending, this month’s readings are considerably better than the numbers in August 2007 – just months before the last recession – when travel (-12) and restaurants (-6) had slipped further to the negative. We point this out because it is useful as one of the benchmarks we’ll be watching for cracks forming in the consumer outlook.

 
 
Consumer Spending Categories - August 2019 vs August 2007
 
 

We also picked up other indications of pressure on consumer pocketbooks with a drop in spending on discretionary household repairs/improvements (-3) and an increase in costs for healthcare services (+4). While they are not overly problematic at these levels, it’s important to monitor fluctuations in these and other specific spending categories for any pressure points that may be building.

 
 

Labor Market Stability Remains Pillar of Support

 
 

Despite the mixed picture presented above, one area of nearly unwavering strength is the US job market. This month’s reading is slightly lower than one year ago with 34% of respondents saying they do not worry at all about someone in their family losing their job and 13% saying they worry a great deal or quite a bit. These results are firmly anchored within the long-term channel observed during the economic recovery of the last several years.

 
 
Job Loss Worries
 
 

A strong labor market has been at the heart of the expansion, with improved wage growth over the past 18 months. Concerns over job losses have remained modest and stable for a long time and suggest no inclination to deviate from current levels. Importantly, a breakdown in this long-term trend line would be an early warning of potential trouble ahead for overall consumer spending and the broader economic outlook.

Trends in hiring, layoffs, and job security also give us valuable insight into business confidence and the economy’s prospects. Present business conditions remain largely favorable and do not portend corporations pulling in the reins through drastic cuts in labor costs.