One of the unexpected takeaways lately was the resilience of consumers. Despite rising prices and interest rates, which often signal trouble for consumer spending, many expected that consumers would overextend themselves, leading to a collapse in spending. However, for the most part, this hasn’t been the case.
This week, we’re focusing on consumer spending, solvency, and confidence data to identify any potential red flags investors should know. Understanding how these factors are evolving is essential, as they can have significant implications for the broader economy and, by extension, the markets.
How Is Consumer Strength Around the World?
U.S. Consumer Spending Trends
Consumer spending accounts for 68% of the US GDP, making the financial health of consumers crucial to both the US and global economies.
Throughout last year, consumers adjusted their spending habits in response to higher prices, but overall spending remained robust. Spending also picked up towards the end of the year and rebounded in February after a dip in January.
While there have been some alarmist headlines about rising credit card delinquencies and debt levels, it’s important to consider the full context.
Although consumer debt is high in absolute terms, household debt as a percentage of GDP is at its lowest point in 20 years. The chart below from the St. Louis Fed shows that while consumer delinquency rates are increasing, they remain lower than at any point from 1988 to 2012.
One concerning figure is the personal savings rate, which dropped to 3.6% in February.
During the pandemic, the savings rate reached record highs, but those savings have now been fully exhausted, leaving savings at historically low levels. While debt doesn’t seem to be spiraling out of control, consumers now have little savings to rely on, which could explain the rise in delinquencies.
Recently, the CEOs of JP Morgan and Bank of America cautioned that consumer spending power may soon be exhausted. This is notable, considering that just a few months ago, they were confident in consumers’ resilience.
In conclusion, US consumers could benefit from a rate cut soon. While managed through last year, they may face significant challenges if inflation rises again in 2024.
Consumer Confidence Is Low In The UK And The Eurozone, But Cooling Inflation Is A Beacon Of Hope
It’s been a different story in Europe and the UK. In Europe, consumer spending is barely higher than it was in 2019, and in the UK it’s below pre-pandemic levels.
When things are going well, revenue should be increasing, with earnings ideally growing at an even faster rate.
UK consumer businesses suffered significant profit losses during the pandemic, followed by pressure from rising costs. Despite this, share prices remain low, meaning any positive shift in the outlook could present opportunities.
Recent data indicate that UK consumer sentiment has improved as inflation has eased, and lower interest rates may be coming. Consumer confidence will likely remain highly sensitive to any news regarding interest rates and inflation in the coming months.
Asia Is A Mixed-Bag of Consumer Confidence, But Most Economies Are On The Road To Recovery
In Asia, consumer spending has shown mixed results, with economies at different stages of the economic cycle.
In China, consumer spending, credit growth, and sentiment have been subdued since 2021, although things have started to stabilize. Consumer confidence in China is heavily influenced by the real estate sector, which serves as many people’s primary savings vehicle.
Both Japan and India saw strong growth in consumer spending through 2023. Japan had a noticeable slowdown in December and January, followed by a slight recovery in February. As for India, while consumer spending data hasn’t been updated since December, there was a significant increase in consumer confidence in January.
South Korea saw a sharp decline in consumer spending throughout 2023 and, in November, became one of the first countries to cut interest rates. Since then, consumer confidence and credit growth have improved, although retail sales have yet to significantly rebound. Observing how quickly consumer spending recovers as rates continue to decrease will be interesting.
The Nuances Of Consumer Sentiment Data
Visual Capitalist recently released a comparison of global consumer confidence for Q4 2023.
What stands out is the disconnect between sentiment and hard data. Despite being in the midst of a major economic slump, China ranked second in terms of consumer confidence. In contrast, the US ranked below average despite posting its best quarter in two years.
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There are a few reasons behind these discrepancies. While consumer sentiment and confidence indicators are exciting and valuable, they require proper context.
These indicators aren’t directly comparable between countries, as sentiment is often influenced by unique, local factors.
Additionally, the indicators within each country can vary significantly. These surveys usually rely on specific questions, meaning they measure different aspects of consumer sentiment.
In the US, two commonly used indicators are the Consumer Confidence Index and the University of Michigan Consumer Sentiment Index. The Consumer Confidence Index asks consumers about the general state of the economy, while the University of Michigan index focuses more on spending attitudes.
Finally, it’s essential to consider the sample size of these surveys. The Consumer Confidence Index typically surveys 3,000 people, while the University of Michigan Sentiment Index surveys 600. This means they represent only a tiny portion of the population, sometimes leading to misinterpretations compared to broader macroeconomic data.
The Insight: Hedging Your Portfolio Against Consumer Weakness
Over the coming months, inflation data and central bank policies will likely have a significant impact on consumer behavior worldwide.
If consumers perceive that prices have stabilized and interest rates have peaked, sentiment could quickly improve. However, if inflation continues or rebounds, consumers are likely to tighten their belts, with limited savings to fall back on.
Businesses that rely heavily on consumer spending will be the most vulnerable to shifts in consumer behavior. So, what types of companies are less affected by consumer spending?
There are three key groups of companies to consider:
Defensive Sectors: Earnings for healthcare, utility, and consumer staples sectors tend to be less cyclical. However, companies should still be evaluated on a case-by-case basis. In this cycle, utility companies have underperformed, but some may offer value, while consumer staples are facing margin pressure.
Energy and Materials Companies: Oil producers can act as a good hedge when inflation squeezes margins for consumer-facing businesses. Materials companies could also benefit if manufacturing or infrastructure development continues while consumer activity slows.
Technology Growth Stocks: For companies whose share prices are based on earnings expected far in the future (five years or more), short-term slowdowns are less significant for their valuation. However, growth stock valuations remain sensitive to changes in interest rates.
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