The University of Michigan Consumer Sentiment metrics were released today, and as one might suspect they were not encouraging.
We wanted to focus on the Sentiment metric specifically. Included in this metric is Current Financial Situation vs. 1 Year ago. This is something, we feel, gets to the heart of how the consumer is really feeling. Unfortunately, it just moved from a 78 reading to 65-middle panel below.
As shown above, the broad metric, CONSSENT, could be testing new lows soon, last print 50.3 vs low of 50.0. Unfortunately, the comparable financial situation metric still has more room to drop before it begins testing new lows, 65 last but 58 was seen during the GFC in 09. We added the Continuing Jobless Claims as well, inverted, for perspective. As shown above, 2 of the 3 charts are most recently moving lower, the question is, will the 3rd follow suit, and if it does will that become a self-reinforcing phenomenon? More unemployed will certainly not be good for any sentiment metric.
As we mentioned a few weeks back, there is a huge focus on non-government employment metrics for obvious reasons. One of those was reported Thursday, and it suggested that the Jobless claims could in fact be headed higher. The Challenger Job Cut metric.
For perspective, we provide a chart below that shows that in the last 10 years it has never been this high at this point in the year.
A reason why the sentiment is getting worse could be related to age demographics. A recent WSJ poll shows that there is quite a difference on perceptions from different age groups.
It’s not just an age thing either. According to Ray Dalio, the US economy is a tail of 2 tapes now.
“RAY DALIO: U.S. ECONOMY IS 2 SEPARATE COUNTRIES NOW, AND ONE IS SCREWED Billionaire investor Ray Dalio says you can’t look at the U.S. economy “as a whole” anymore because the gap between winners and losers is too extreme. About 3 million people (1% of the population) in AI and tech are thriving, while the bottom 60% are struggling hard. Dalio: “If you’re looking at, let’s say, the AI world, and really what amounts to about three million people – 1% of the population – leading, and then the 5 or 10% around them, you have one world that the whole world is dependent on. And then you have the bottom 60% of the population. Consider this, 60% of the American population has below sixth-grade reading level. That’s tough, and with that [they’re becoming] unproductive, and because of those things you have a dependency, an extreme dependency.” The numbers back him up. 22 states are in recession while only 16 are growing. California and New York carry the entire economy on their backs. Wealth inequality has exploded since 2020. The top 0.1% nearly doubled their wealth from $12 trillion to $22 trillion. The bottom 50% gained just $2 trillion combined. The economy now runs on spending from the rich. If they stop, everyone else is toast.” Source: Fortune
Tough to be optimistic if you are part of the 60% “struggling hard”.
But are there any leading indicators that indicate that sentiment levels are impacting the economy?
We looked at a couple different things to see if we could find something of predictive value out there.
BAA spread to the 3-month Treasury is what we landed on.
In the chart below if that spread dips below 1, it looks to us like a recession is not too far off. Good easily be coincidental, or a signal, you can be the judge.
To look for indications of the slowing economy we thought shipping containers might give us some clue.
Dry Containers shipped from China to the US, dropping to dangerously low levels.
The above chart points out how far away the levels can get from their 50-day moving average. It looks to us like an extreme level would be 50% away, as it has during 2020 and early 2023.
Not extreme levels yet, but certainly indications of slowing.
The bond market may be picking up on this as well though.
Finally, there is nothing like anecdotal evidence. Most recently we have heard more than few CEO’s comments about conditions.
CMG CEO:
“Earlier this year, as consumer sentiment declined sharply, we saw a broad-based pullback in frequency across all income cohorts. Since then, the gap has widened, with low to middle-income guests further reducing frequency. We believe that this guest, with household income below $100,000, represents about 40% of our total sales, and based on our data, is dining out less often due to concerns about the economy and inflation. A particularly challenged cohort is the 25 to 35-year-old age group. We believe that this trend is not unique to Chipotle and is occurring across all restaurants, as well as many discretionary categories.”
From the PYPL call:
“when we got into September, we began to see macro-related deceleration, and that is both in the US and in Europe…. a relatively consistent number of transactions, but we’re seeing basket sizes just trade down – average order value being down, particularly in retail, where consumers are just being more selective, and that behavior has continued into October.”
and finally, UPST
UPST- Said low end credit is about as stressed as its been in last few quarters, not much change but Prime, their definition is more like 680-740ish got worse and is starting to unravel which is the first time we have heard this, might be an UPST-specific thing vs a canary.
Since the consumer drives 70% of the economy, we think it wise to pay attention to how they are feeling, the idea that there may be 2 separate identities of consumers is not a new concept. But what warrants attention is which will impact the other first?
Have a great week!
Best,
Meraki Trading Team
