Confidence, Consumers & Cash

Last week we focused on jobs and wages trends underway across the UK and Europe. This week we steer towards the US, focusing on recent sentiment-based data. This is what is also referred to as soft data or forward-looking data. We then look at how sentiment data feeds into fundamental data often referred to as hard or backward-looking data.

One of the leading indicators used by economists in the US is the Michigan Consumer Sentiment Index, or Michigan CSI. This measures the average confidence level of typical consumers. It is an insightful index which can act as a barometer for future spending. Later, we look at the signal from the CSI and how it leads hard data on retail sales. In other words, we can use the index as a gauge for future spending trends.

What we do know is that consumers who feel confident about the economy are also usually more optimistic about their employment prospects. Therefore, they typically have an increased willingness to buy larger scale asset purchases such as houses but also spend more on smaller discretionary and non-discretionary items such as holidays, food and clothing. These items are captured through retail sales data indices.

To begin, we examine the way sentiment can shift. For example, after December’s sell-off in equity markets, we can see how the CSI index dropped quite dramatically. Presumably, consumers felt less well-off and, affected by market uncertainty, their confidence dipped. When equity markets recovered the CSI index rebounded strongly in February, with a continued resurgence in March.

University of Michigan Consumer Sentiment Index

Source: Bloomberg, March 2019

If these shifts take place in the short-term then what about longer-term trends? In the chart below, we review the behaviour of the CSI index over the last 10 years. This demonstrates a very strong recovery in confidence levels since the financial crash.

University of Michigan Sentiment Index 3 Month Moving Average

Source: Bloomberg, March 2019

With confidence levels high we can see this reflected in higher retail spending in the following chart. Here annual sales are trending strongly positive, peaking at 9% in December 2018. The dip in confidence after December translated into lower levels of spending but with confidence recovering again we expect to see retail sales starting to push higher.

Redbook Retail Sales Growth

Source: Bloomberg, March 2019

This shifting pattern of confidence and retail sales is what brings us back to wages. While rising stock markets make people feel wealthier, higher wages, as pointed out last week, lift disposable incomes. This is what increases the propensity to spend.

We leave you with a chart which shows that wages are rising nicely in the US, not just in nominal terms, but more importantly in real terms after taking account of inflation which should continue to bolster consumer confidence.

US Wage Growth Vs Inflation

Source: Bloomberg, March 2019