US Consumer on the Verge of Cracking, Survey Shows

Introduction

(Bloomberg) — After staving off recession for longer than many thought possible, the US consumer is finally about to crack, according to Bloomberg’s latest Markets Live Pulse survey.

Survey Results

• More than half of 526 respondents said that personal consumption will shrink in early 2024, which would be the first quarterly decline since the onset of the pandemic.
• Another 21% said the reversal will happen even sooner, in the last quarter of this year.
• High borrowing costs and depleted Covid-era savings are expected to contribute to the decline in consumer spending.

Potential Impact on Stock Market

The finding contradicts the optimism in US equity markets, which have been buoyed by cooling inflation and low unemployment. If consumer spending contracts, it could lead to a halt in economic growth and negatively impact the stock market.

According to Alec Young, chief investment strategist at MAPsignals, “If the market loses confidence in that scenario, then stocks are vulnerable.”

Is the Strength in Consumption Sustainable?

Growth is currently forecasted to accelerate in the third quarter due to increased household spending. However, analysts question the sustainability of this strength in consumption. Anna Wong, Bloomberg Economics’ chief US economist, expects a recession to start by year-end, stating that the current consumption trend is driven by one-off factors such as summer splurges on movies and concert tours.

Challenges Ahead

The Federal Reserve Bank of San Francisco warns that the excess savings that have helped consumers cope with price spikes will run out in the current quarter. This sentiment is echoed by 75% of the MLIV Pulse survey respondents.

Delinquency rates on credit cards and auto loans are rising, and student loans are about to come due again for millions of Americans who benefited from the pandemic freeze on repayments.

Obstacles for Consumers

The declining availability and soaring cost of credit, along with rising mortgage rates, are cited as the biggest obstacles for consumers in the coming months. Auto and retail stocks are considered the most vulnerable to declining savings and tighter consumer credit.

Investor Concerns

Investors are concerned about the impact on the economy and markets since it heavily relies on consumer behavior. MLIV Pulse survey respondents are looking at various indicators such as retail sales, credit-card delinquencies, airline bookings, pet adoptions, and “Buy Now Pay Later” installment plans to gauge consumer sentiment.