Perception Is Reality for Consumer Spending

By: Spencer Schiff (@SchiffSpencer)

The recession narrative is suddenly catching on. That could spell major trouble for consumer spending and our economy as a whole.

Following the recent 2s10s inversion and subsequent stock market volatility, countless prominent news outlets have been reporting on the possibility of an impending economic downturn. The number of articles mentioning recession has spiked to a multi-year high. Even late-night talk shows, which garner millions of viewers, are covering the story.

The recession hysteria hasn’t been confined to cable television and editorials; social media is abuzz with worry as well. Last Wednesday, Twitter’s top trending term in the US was #TrumpRecession. The significance of this occurrence shouldn’t be trivialized; Its widespread usage and broad representation of the US population makes it highly indicative of prevailing sentiment.

Nowhere is the omnipresent fear more apparent than with data from Google. Searches containing the word “recession” have skyrocketed to the highest level since March of 2009.

Between blaring headlines on cable TV banners, newspaper articles, and social media posts, Americans are being inundated with dire economic warnings. With the horrors of the Great Recession still fresh in their memories, they’ll likely begin to prepare by reducing their discretionary spending in order to accumulate savings. According to Bankrate, 82% of Americans don’t have 6 months worth of income stored away for tough times. 28% have absolutely nothing saved. Hence the vast majority of Americans feel unprepared for any financial hardship. For them, reaching an adequate level of savings would require a drastic expenditure curtailment. While this would certainly be beneficial to their balance sheets, it would have an enormous negative impact on overall consumer spending growth.

The recent emergence of widespread economic weakness leaves consumer spending, which makes up approximately 70% of our GDP, as a crucial pillar supporting the current expansion. In fact, besides government outlays, it was the only major GDP component that contributed positively to growth in Q2.

Clearly, any shift in consumer psychology/behavior could knock a critical support out from under our economy. And that appears to have already begun. Last Friday, the University of Michigan published its survey-based reading on consumer sentiment for the 1st half of August. The index fell to a 7-month low, and the perceived buying conditions for items such as large household appliances registered substantial declines. In a new CNN poll conducted from August 15th through August 18th, the percentage of respondents who rated the economy as “good” declined by 5 percentage points from May. Those expecting a positive economic environment one year from now fell 10 percentage points from December. These types of surveys tend to correlate with data on consumer spending, thus a continuation of these trends would be extremely concerning.

Upcoming data releases will further reveal the extent to which damage has been done to consumer psyche. Today the Conference Board will release the results of its monthly Consumer Confidence survey. On Friday, UMich will publish the final reading on its aforementioned survey for the entirety of August. Nationwide retail sales data will be published on September 13th by the Census Bureau. In light of recent developments, this data merits extra attention.

It may soon become apparent that consumer spending, currently our primary recession deterrent, has ground to a halt. If so, a serious economic downturn awaits.