Consumer Will Prevent A Q4 Recession

No Recession In Q4: Strong Consumer

If this is a recession, no one told consumers. A key takeaway from the November consumer sentiment report is the economy isn’t in a recession now. Consumer spending growth should be solid in November and December. Many think the best chance of negative GDP growth is in Q4 2019 because the economy will rebound next year. Mostly due to an improvement in global cyclical growth, Fed’s rate cuts, and the trade deal. Obviously it is then important for consumer confidence to be strong. 

In the quarter with the best chance of being the start of a recession because of weak business investment, there probably won’t be negative GDP growth. Consumer were very confident in November as the University of Michigan report shows. If you think the economy will weaken in Q4 and get weaker in 1H 2020, this report won't change your thesis.

Personally, I see this quarter as being the worst of this mini cycle because the manufacturing sector is bottoming and rate cuts are about to help growth. If there isn’t a recession with weak business investment, when will there be one? (There also wasn’t a recession when the housing market was weak in 2H 2018 and 1H 2019.) The answer to that question is when the labor market weakens enough to hurt consumer spending. 

Debt won’t be an issue for consumers this cycle because they aren’t highly leveraged. However, no matter how much savings people have, they will spend less if they lose their jobs. It’s true that the employment market has seen lower growth, but there hasn’t been a spike in jobless claims. There was a spike in layoff announcements in Q1, but they haven’t been high recently. It’s amazing that even though NIPA margins have fallen for 4.5 years, there haven’t been mass layoffs. I don’t see a catalyst for layoffs to spike Therefore, I don’t see a recession occurring soon.

Strong Consumer Sentiment

Let’s look at the details of the consumer sentiment report which inspired me to explain why a strong consumer in November means there won’t be a recession soon. Keep in mind, this reading is different from the Bloomberg Consumer Comfort reading from earlier this month (I’ll review the latest weekly report later). 

The final University of Michigan sentiment index had a nice jump from the preliminary reading. As you can see from the chart below, it was 96.8 which was above the preliminary reading of 95.7 and the October reading of 95.5. It’s nowhere close to the readings at the start of the past 5 recessions. Highest one was 91.5 before the 2001 recession. This is why many said there won’t be a recession in Q4. Also, recognize that the reading of 91.5 was a sizable drop from the 1990s peak. This cycle had a lower peak which probably means the first month of the next recession will have a reading in the 80s.

Expectations index increased and the current index decreased. That lowers the chance of a recession based on the difference between the expectations and current index. I don’t follow that difference closely, but many do. The current index fell from 113.2 to 111.6 and the expectations index rose from 84.2 to 87.3. They had yearly growth of -0.6% and -0.9%, but these are still great readings compared to historical and recent results. 

The consumer stated their current financial situation was better than last year. This index is calculated by subtracting the percentage of consumers who said their financial situation is worse from the percentage who said it was better. 3 month moving average of that index is 33%. Cycle peak was 36% in April 2018. The highest reading ever was 38% (going back to the 1960s).

Details Of Consumer Sentiment

This was a great report as the average since 2017 is 97 which is just 0.2 from the current reading. It’s much above the recent troughs let alone the recessionary troughs. The index has been elevated recently as in 30 of the past 35 monthly readings, the index was 95 or higher. This period of optimism is 2nd to the late 1990s when the index was above 100 in 34 of the 36 months from January 1998 to December 2000. 

In that period, it averaged 106. It’s ironic that in both periods, there were impeachment proceedings. In this period, there is more partisanship and a greater difference between business and consumer confidence. Partisanship is either canceling out or leaning slightly positive. Even if a consumer thinks the economy will tank because of partisan reasons, it probably won’t hurt their spending significantly. Especially if they have a good job that is secure and provides consistently positive real wage growth.

Consumers don’t expect declines in inflation, unemployment, and rates, but they don’t expect major spikes either. I believe they are correct. Consumers are expecting their personal financial situation to improve as there were gains expected throughout the income distribution. 

Remember, there was weakness in the Bloomberg Comfort index for those making under $50,000 earlier this month. There were net increases in household wealth probably because of the lessened but still positive growth in home prices and the spike in the stock market. There was also renewed excitement about store discounts and falling mortgage rates.  

Bloomberg Consumer Comfort Index Improves

A prior update of the Bloomberg Consumer Comfort index was terrible as the recent 3 week drop was the largest since 2008. That changed in the week ending November 17th as the index increased for the first time in 5 weeks. It went up from 58 to 59.1. The consumer’s opinion of their personal finances, the buying climate, and the economy increased. 

Economic expectations rose to a 4 month high. 32% of respondents said the economy is improving and 30% said it’s getting worse. Confidence from Republicans fell to the lowest level since May 2018. They probably became less optimistic because of the impeachment inquiry proceedings.

Their confidence has fallen 5 straight weeks and is down 10 points from the record in September. Independents and Democrats became more confident. That could be the start of a new trend as their confidence had been falling with that of Republicans.  

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