Consumer Expectations Sour as Market Turns Lower

Economic Report Monitor #55

July 28th, 2020

Consumer confidence is an important indicator of consumption and overall economic health as the US economy as measured by GDP is heavily driven by consumption. Since the beginning of the COVID-19 pandemic, current measures of consumer confidence in the two main surveys for the indicator, the Conference Board Consumer Confidence Index and the University of Michigan Survey of Consumers, have trended near all-time lows comparable to the 2008 financial crisis. However, readings of expectations typically fared better as the initial evaluation of consumers was that the lockdowns and pandemic would be temporary. Almost 5 months later, those trends have begun to reverse.

In today's Conference Board Consumer Confidence Index July report, the index reported a drop from 98.3 in June to 92.6 in July with a large deterioration in expectations. The current conditions index continued to improve as reopening measures assuaged concerns of financial instability, but the expectations index fell a harsh 14.6 pts to 91.5 to finish below the current conditions index reading of 94.2. The early reading of the UMich Survey of Consumers July report showed this trend as well as its current conditions index fell just -3.3% to 84.2 and its expectations index fell -8.4% to 66.3.

The details of the Conference Board July report suggest consumers weren't seeing stagnation in the economy but further contraction. The percentage expecting an improvement in business conditions dropped from 42.4% to 31.6%, and the percentage expecting more jobs fell from 38.6% to 30.6%. Those previously positive respondents didn't opt for an "unchanged" outlook but instead saw a contraction. The percentage expecting worse business conditions increased from 15.2% to 19.3% and the percentage seeing fewer jobs jumped from 38.4% to 30.6%. It's likely that these newly negative respondents were representatives of states seeing a resurgence in COVID-19 like Michigan, Florida, Texas, and California. These states saw "large declines" in their consumer confidence as pointed out by the Senior Director of Economic Indicators at Conference Board.

With the stock market being a largely leading indicator, it can be especially susceptible to measures of deteriorating expectations. A slightly extended sell-off began last Thursday, July 23rd with major indexes dropping about -1-2% since then including a risk-off today. If the bounce in equities seen in May was accompanied with improvements in consumer expectations, then a reversal in those expectations could be a light signal of the opposite. In the news lately, gold and silver have taken over the headlines as evidence that the shedding of risk has intensified. It's no coincidence that the desire for safer assets has grown with heightened consumer fear.

Other Reports:

• S&P CoreLogic Case-Shiller National Home Price Index fell to a 4.5% YoY gain in May, down from 4.6% in April. The 10-City and 20-City YoY gains decelerated more, from 3.3% to 3.1% and from 3.9% and 3.7% respectively. Awaiting more data to see COVID-19 impact.
• Richmond Fed Manufacturing Survey composite index grew from 0 to 10 to expansionary. Shipments grew from -4 to 23 and new orders from 7 to 9 as reopening encouraged growth. Number of employees remained contractionary while wages improved. Capital expenditures continue to fall at -15, and services expenditures fell at -23. Expectations were tepid with most index values were flat or decreasing.