(Bloomberg) – After averting recession for longer than many thought possible, US consumers are finally on the verge of a breakthrough, according to Bloomberg’s latest Markets Live Pulse survey.
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More than half of the 526 respondents said personal consumption – the main engine of economic growth – will fall in early 2024, which would be the first quarterly decline since the pandemic began. A further 21% said the trend reversal will happen even earlier, in the last quarter of this year, as high borrowing costs weigh on household budgets and coronavirus-era savings dwindle.
The result is at odds with the optimism that permeated U.S. stock markets for most of the summer, as cooling inflation and low unemployment fueled hopes of a so-called soft landing. If the economy stops growing – a scenario that is very likely as consumer spending declines – that could mean further downside for stocks, which have already slipped from their late July highs.
“The likelihood of a soft landing, falling inflation, an end to Fed tightening, a peak in interest rates, a stable dollar, stable oil prices – all of these things helped drive the market higher,” says Alec Young, chief executive officer. Investment Strategist at MAPsignals. “If the market loses confidence in this scenario, stocks will be vulnerable.”
“It’s not sustainable”
Currently, the US economy appears to be accelerating rather than stagnating. Growth is expected to accelerate in the third quarter on a recent pick-up in household spending, which posted the strongest increase in six months in July.
For some analysts, it looks a bit like a last hurrah.
“The big question is: Is this level of consumption sustainable?” said Anna Wong, chief U.S. economist at Bloomberg Economics, who expects a recession to begin by the end of the year. “It’s not sustainable because it’s driven by these one-off factors” — particularly a summer binge of blockbuster movies and concert tours.
The story goes on
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The continued strength of the U.S. labor market has supported household spending amid the biggest price increases in decades. This has led some analysts to raise their expectations of a recession – or even scrap them altogether.
Economists at Goldman Sachs Group Inc. expect consumers to outperform again in 2024 – sustaining economic growth – with steady job growth and wage increases outpacing inflation.
“Really Struggling”
But there is a lot of headwind.
Researchers at the Federal Reserve Bank of San Francisco say the excess savings that helped consumers weather the price rise will be depleted in the current quarter – an assessment with which three-quarters of MLIV Pulse respondents agreed.
“There’s increasingly a problem where the lower end of the income and wealth spectrum is really struggling with the accumulated inflation of the last few years,” while wealthier Americans are still cushioned by savings and wealth growth, said Thomas Simons, U.S. economist at Jefferies.
Overall, consumers have been able to bear the burden of higher prices, he said. “But at some point there will come a point where this is no longer possible.”
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Default rates on credit cards and auto loans are rising as households feel the pinch after the Fed raised interest rates by more than 5 percentage points.
And another type of debt — student loans — will soon come due again for millions of Americans who benefited from the pandemic-related repayment freeze.
A majority of investors in the MLIV Pulse survey pointed to the declining availability and rising cost of credit – mortgage rates are near two-decade highs – as the biggest obstacle for consumers in the coming months.
About three-quarters of respondents said auto or retail stocks were most vulnerable to declining excess savings and tighter consumer credit – a concern not fully priced in by markets. While General Motors Co. and Ford Motor Co. have virtually missed out on this year’s broader stock rally, Tesla Inc. has more than doubled in value.
“Just takes longer”
With the fate of the economy hanging on what US consumers do next, investors are looking to all sorts of places for an answer.
When asked what they think is a good leading indicator, MLIV Pulse respondents pointed to everything from the most common measures – like retail sales or credit card delinquencies – to flight bookings, pet adoptions and the use of “Buy Now, pay later”.
This is perhaps because traditional travel guides have often proven unreliable in the turmoil of recent years.
“The traditional blueprint for the economy and markets is challenging in this post-pandemic environment,” said Keith Lerner, co-chief investment officer at Truist Wealth. “It just takes longer for things to develop.”
The MLIV Pulse poll of Bloomberg News readers in terminals and online is conducted weekly by Bloomberg’s Markets Live team, who also runs the MLIV blog. This week’s MLIV Pulse survey asks whether investors have fully regained the confidence in UK assets they lost during Liz Truss’ short-lived tenure. Click here to share your views.
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