Today's UMich Consumer Sentiment report was a painful eye-opener: as we noted earlier, following UMich's sentiment slump in July, analysts expected a further (modest) slide in Americans' confidence in preliminary August data this morning but they were very wrong as sentiment crashed in early August data according to UMich Sentiment survey with the headline plunging from 81.2 to 70.0 - that is weaker than the April 2020 COVID crisis lows, while expectations collapsed too.
As UMich economist Richard Curtin observed over the past half century the Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy: the only larger declines in the Sentiment Index occurred during the economy’s shutdown in April 2020 (-19.4%) and at the depths of the Great Recession in October 2008 (-18.1%).
Furthermore, the sentiment shift wasn't confined to just one demographic: the losses in early August were widespread across income, age, and education subgroups and observed across all regions. Moreover, the loses covered all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment.
It was not exactly clear what prompted this collapse: on one hand Curtin said that "there is little doubt that the pandemic’s resurgence due to the Delta variant has been met with a mixture of reason and emotion. Consumers have correctly reasoned that the economy’s performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end."
However, another just as likely reason for the sudden adverse shift in sentiment is the continued explosion in prices, which manifested itself in the continued rise in inflation expectations: while short-term inflation expectations eased very modestly (to "only" 4.6% from 4.7%) longer-term expectations rebounded back to multiyear highs, with consumers now seeing inflation averaging 3.0% over the next five years, up from 2.8% in the past two months.
Commenting on this ominous shift in inflation expectations Curtin said that "although the small August decline is consistent with the transient hypothesis, the recent data on long term inflation expectations were not: inflation was expected to average 3.0% over the next five years, up from 2.8% in the past two months, regaining the same level as in May."
Underscoring the ongoing inflation shock, UMich also noted that reactions to market prices on purchases for homes, vehicles, and household durables were the most negative ever recorded in the long history of the surveys, with a record number of respondents remarking on the bad buying conditions for virtually every product category.
As UMich added, "aversion to higher prices caused consumers to judge buying conditions negatively: favorable ratings fell to just 30% for homes, 31% for vehicles, and 43% for household durables—all were the lowest since the 1980 recessions. This distaste was greatest among households with incomes in the top third, who represent over half of all consumer purchases. Importantly, price hikes by sellers need to be confirmed by buyers before those hikes enter into the various inflation gauges."
It gets worse: the survey noted that inflation’s impact on family budgets continued to grow in August, cited by 18% of all households, up from 13% last month and 5% at the start of the year. The complaints about lower living standards due to inflation were voiced by 29% of those aged 65 or older, by 25% of those with a high school education or less, and by 24% of households with incomes in the bottom third.
Whatever optimism Americans had toward the economy has vaporized as consumers became far more pessimistic about further declines in the national unemployment rate, despite the record job openings with just 36% of consumers anticipating a decline in the jobless rate, down from 52% last month. This, according to Curtin, reflects an anticipated slowdown in the year ahead as just 32% of consumers thought that the economy would improve, well below last month’s 45% and the 50% in June.
And the punchline: with fewer consumers saying the year ahead prospects for the economy could be described as good (31%, down from July’s 50%) the majority (57%) now expect a renewed downturn over the longer term.
What is scary is that according to the latest Bank of America debit and credit card spending data, this is already starting to manifest itself in actual spending which is slowing and will have an adverse impact on overall economic growth (as a reminder 70% of US GDP is derived from consumer spending).
With the benefit of stimmies now long gone, and consumers having burned through much if not all of their pandemic savings, BofA found that total card spending was down 1.3% on a month-over-month seasonally adjusted basis, and when slicing the data further, retail sales ex-autos was down a more notable 2.4% mom sa.
This means that the upcoming retail sales report, where consensus expects a 0.2% ex-autos print, will be a major disappointment.
According to BofA economist Michelle Meyer, there are two critical reasons for the weakness:
- online retail sales (card not present) declined, which BofA believes is in large part to the timing of Prime Day promotions this year. Historically Prime Day is in mid-July but this year was pulled forward to June. Since the seasonal factors are set based on a gain in July, the data will be adjusted lower on a SA basis for online spending.
- Services spending still increased over the month but at a moderating pace providing an insufficient offset to the weakening in goods spending.
Digging deeper into the latter, BofA's proxy for services spending, which includes airfare, lodging, entertainment, restaurants and bars, continued to slide in the most recent week to a 2-year growth rate of 5.7%. This is down from the recent high in late-June of 14.6%. The biggest deceleration continues to be in spending on airfare which reflects concerns over the Delta variant. At the same time, durable goods spending (electronics +furniture +home improvement) weakened, with 2-year growth of 24%. What’s left? A combination of other services which tend to be less cyclical and nondurable goods spending which continues to run at a trend pace.
A similar slowdown in covid-linked categories was observed also by JPMorgan whose own Chase card spending data showed that “retail spending outcomes have fallen short of our model in recent months. Our US card data reinforces this note of caution, showing a loss of momentum for airline spending and leveling off for restaurant spending this quarter."
While one can debate the reasons behind it, it's now abundantly clear that spending across many categories has slowed down sharply not just for services but also across goods:
The bottom line, no matter how one slices the data, is that whether it's Delta or surging inflation, consumer optimism is collapsing and is starting to depress spending. Incidentally, we didn't need UMich to tell us this: as we noted earlier this week, small-business confidence plunged in August to its lowest level since early spring, as the rise in Covid-19 cases due to the highly transmissible Delta variant put a damper on expectations and turned entrepreneurs more cautious, while surging prices fanned fears about plunging margins.
An anecdote from the WSJ captures well the reversal in sentiment: at Wizard Studios, an event production company with 25 employees, bookings jumped in May after the Centers for Disease Control and Prevention lifted mask mandates. The Brooklyn, N.Y., company added nine employees this year after laying off half of its 32-person workforce in March 2020. On Friday, one client indefinitely postponed plans for a launch party for a television event and another put off plans for a multiday corporate meeting at a Hamptons beach resort, bringing total cancellations and postponements to five this week.
The recent flurry of cancellations “is creating a lot of anxiety,” said Wizard President Matthew Saravay, who now expects revenue to be 25% lower than forecast. “It’s just slowing down more than I anticipated. Who knows where the bottom is.”
“We were slowly ramping up in anticipation of a robust third and fourth quarter,” he said. “You can drop the ‘ro’ part. It seems like it is just a bust.”
Avanti International which has roughly 20 employees, said demand for the company’s injection grouts remained strong last year, in part because most capital projects were already in process when Covid-19 hit and infrastructure maintenance continued. The Houston-based company manufactures and supplies grouts used to stabilize soil and keep groundwater from infiltrating subway lines, sewer systems and other infrastructure.
“With the Delta variant and potential concern for rising caseloads, a lot of municipalities and government agencies are delaying projects,” said Avanti President Britt Babcock.
UBS economist Paul Donovan may have summarized the coming slowdown best, writing that "there has been a US consumer goods demand surge, as consumers have spent the savings they acquired against their will. Once those savings have gone, US consumers’ demand will be based off incomes, plus whatever credit they can get. But the real spending power of US income is now falling, as headline inflation exceeds income growth. This limits the power of future demand to push up prices indefinitely."
While some will certainly find solace in this latest downturn in sentiment, especially market bulls who are observing today's tumble in bond yields and the dollar - as an economic contraction will certainly push back the Fed's tapering (and tightening) timeline - there is a more insidious dynamic to consider: with US consumers having suffered through the covid lockdowns, at least they had generous stimulus payments to look forward to. Not this time, and especially not in just a few weeks, when all the emergency unemployment insurance claims from the pandemic are set to expire next month. This means that either the Delta variant (which will likely be supplanted by the "even deadlier" Lambda variant shortly) has to get far worse to trigger even more stimmies but not before leading to another round of mass business shutdowns and economic lockdowns, or the pandemic will have to fade away and soon, or else sentiment will continue to deteriorate, leading to even more pessimistic sentiment, and even more spending slowdowns.
This is the dilemma facing the Biden administration, and how the president responds could mean all the difference in the world in next November's midterm elections.