A consumer message to Wall Street
If I were a coffee drinker, then I would have knocked over a cup of coffee on my keyboard last 13th August, when the latest US consumer confidence number was released (graph one). After the feeling of relief among US consumers following the re-opening of the American society, consumer confidence turned out to be surprisingly soft over the past months. The drop from index 81.2 in July to index 70.2 in August was such a big surprise, that I thought it was an error when the number flashed on the news screen – but it was not.
The immediate reaction on Wall Street was to offload stocks, which is understandable. The consumer confidence dropped to a ten-year low, so compared to a market expectation of an unchanged reading, it underlines the surprise.
All sub-groups in the survey confirmed the negative mood. It means all different age groups, income groups, educational background, religion, etc. Quite simply, all American consumers became much more worried about the future. Across all respondents, the concerns were the same, where rising inflation, employment, and personal finances were quoted as specific reasons. From July to August, the number of Covid-19 infected persons also went up significantly, and I consider the consumer reaction as a sort of Covid-19 disappointment, or fatigue.
How Wall Street digested the steep drop in consumer confidence, shrugged it off, and continued its everyday climb towards new highs, might be based on a rock-solid trust in the future, or the famous ample liquidity. Certainly, all groupings and people around the globe, not only in the financial markets, want to move out of the Covid-19 tightness and simply return to life before the virus. This strong mutual desire embeds the risk of a collective sort of reality blindness. The reality might be that no society has learned to live with the Covid risk, as the plan for everybody from day one, was to get vaccinated and move on, a plan that was valid from an individual person to country level. The current outlook is more that there will be super-jabbed groups/nations, who have received a third vaccine shot as well, and then the rest of the world, which represent a significant majority.
I am not frightened by the low US consumer confidence reading, but consumers in Europe are also getting less optimistic (graph two), and retail sales has taken a step back. It has also become more difficult for the consumers to spend money due to the global supply chain bottle necks, like in the car production. The key is that the economic push forward, which is widespread and expected also among investors, might not generate as much steam from the consumers as expected. Maybe the US consumer confidence data shows something more than just the enormity of the drop in the index – why are American consumers concerned about employment and personal finance when the US labour market is almost back at a hot level? It’s a question that requires more time to investigate, but I take it as a sort of a consumers’ bellwether message to Wall Street – there is currently a growing cautiousness among consumers.
If the global stock market had been in a huge bubble, then this kind of news from the US consumers could have sent the market in a deep nosedive. So far, it has not happened, and the trust in economic growth is intact, though on the other hand, the economic growth needs to find fuel somewhere else.
Most of the global corporations have done well during the Covid-19 and will probably continue with their investment plans, and I would expect the same from the next layer of corporations. But I remain very much in doubt about the small and mid-sized corporations, as some are heavily troubled due to the lockdowns. Business investments will contribute to the economic growth in total, but I am not certain that this economic engine can satisfy the financial markets expectations.
The third economic engine is increased public spending, where the American growth package is now finally approved. This is of course, priced in the growth expectations by investors already, and so is the biggest growth package ever in the EU – even though nobody knows anything about how that process is moving forward.
Totally, the positive effects from the different economic engines will probably not meet the current expectations in the financial markets, and maybe not even among consumers in general. It sounds very worrisome, but this doesn’t have to be the outcome.
I expect that governments in many Western countries and in some Emerging Market economies will simply come up with more so-called growth packages to fight any Covid-19 related prolonged economic headwind. Such solutions are, in my view, not healthy from a macroeconomic perspective and if a downturn emerges at a later stage, then it will hit the weak economies very hard – I regard the downturn as a likely outcome one day in the future, but it is not a concern right now, making more fiscal spending such an easy solution.
