When the bond market showed an inverted yield curve in late August, the stock market sold off 800 points in a day. When President Trump announced new tariffs on China, which retaliated with its own tariffs, the stock market trended downward and talk started about an impending trade-war recession. Meanwhile, in a world where they don’t obsess over breathless news reports minute-by-minute, consumer confidence from the Conference Board in August came in at 131, close to matching the previous month’s 135.7, and not too far off last October’s 137.9, an 18-year high. And last Friday, the University of Michigan’s measure on consumer sentiment rose to 92, from 89.8 in August. And even as the Fed was lowering interest rates by 25 basis points, housing starts in August (released this week) were hitting a 12-year high.
“At least for the time being consumers seem to be shrugging off some of the negative news we’ve been seeing,” says Lynn Franco, Sr. Director of Economic Indicators at the Conference Board. “Fundamentals are supporting job growth and income growth, which is their first-hand experience.” In fact, consumer spending was the economy’s primary source of fuel in the second quarter. At 4.7%, it was the fastest pace in four years.
But, of course, things could change in the coming months, especially if the global economy continues to slow. “If headlines continue to predict a recession by citing yield curve inversion and other indicators, eventually it could become a self-fulfilling prophecy,” says David Kudla, CEO & Chief Investment Officer at Mainstay Capital Management. “U.S. manufacturing is already in recession,” says Kudla, “with the risk that the weakness may become more widespread. It’s also very likely that the impact of the tariffs will finally bleed over into Main Street and cause a change in consumer spending habits.”
A change in spending habits could affect the very fundamentals that drive the economy. “When you see the stock market volatility or the stock market selling off, you see individuals get more concerned,” says James Russo, President and Chief Market Strategist at Altrius Capital Management. “They might not go out and buy that boat or new house, and small businesses may not hire those new workers when they are concerned about the future.” That could lead to a slowing economy, followed by layoffs, followed by less spending, and so on.
Another concern on Wall Street is that after ten years, this expansion is getting a bit long in the tooth. But Robert Shiller, Sterling Professor of Economics at Yale, says you can’t just look at a calendar. “Business fluctuations are more irregular than this thinking would suggest. I like to think of economic fluctuations as something rather more like random epidemics that break out from time to time.” Shiller does believe, however, that the stories we tell ourselves can have economic consequences. He talks about the phenomenon in his new book, Narrative Economics: How Stories Go Viral and Drive Major Economic Events. But that doesn’t mean recession is imminent. “There is a question whether the current expansion is overdue to end. In my view, this view predicts an end of the expansion soon only if the narrative about the business cycle of fixed length is currently active. I don’t see much evidence that the broad public is fixated on such a narrative now.”
The Conference Board’s Franco agrees. “We would start to see consumers pull back in the big-ticket item purchases, but we’re not seeing that right now. And consumers are very good at forecasting recessions ” In fact, better than Wall Street. “Wall Street always has a different perspective. With our CEO survey, they’re much more pessimistic than consumers.” Perhaps the crucial point from Franco is that consumer confidence measures consumers’ willingness to spend, but not necessarily their ability to spend. That comes from wages and income. “Right now there is a high willingness to spend. That will probably change when there’s a hit to their ability to spend.”
So as the yield curve inverts, the manufacturing sector weakens, and the stock market fluctuates between “head for the hills” and “we’re going to hit new highs,” consumer confidence continues to move sideways at historically high levels. If the business media are talking us into a recession, so far the consumer isn’t listening. And since the consumer accounts for 70% of the economy, that matters.
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