Sour Consumer Moods Don’t Foretell Slow Spending

Is US consumer spending losing steam as we enter 2023’s final quarter? Real (i.e., inflation-adjusted) personal consumption expenditures (PCE) rose just 0.1% m/m in August.^[i] Now many fret headwinds (e.g., elevated inflation and rising gasoline costs) will sour consumer sentiment more and discouraged people will slash future spending. Some households are no doubt pinched. But don’t take it too far. As we will explain, dour sentiment doesn’t foretell consumer spending—worth keeping in mind for investors amid the many warnings a major component of US GDP (and therefore stocks’ economic fundamentals) is on shaky ground. In our view, the fear is a brick in this bull market’s wall of worry.

August real PCE decelerated from July’s 0.6% m/m pace, with goods spending contracting and services rising—continuing a now well-established trend.^[ii] Alongside slower spending, a spate of recent consumer sentiment surveys showed attitudes about the economy have worsened, fanning fears of worse to come. The University of Michigan’s (U-Mich’s) widely followed “Survey of Consumers” slipped 1.4 index points, from August’s 69.5 to September’s 68.1—both well below the long-term monthly average, 85.1.^[iii] Respondents cited multiple sources of uncertainty—from a possible government shutdown to auto industry strikes—along with rising food and gas prices. The Conference Board’s Consumer Confidence Index, which also fell in September, had similar findings, with frequent mentions of higher grocery and gasoline prices. These dour results fueled worries pessimistic consumers will be less likely to spend, hurting a big chunk of the economy.

However, recent history refutes this. See last year, when US consumer sentiment—as measured by U-Mich—fell to a record low 50.0 in June. Yet real PCE chugged along. (Exhibit 1)

Exhibit 1: Poor Moods Didn’t Derail Spending

Source: FactSet, as of 10/2/2023. Real PCE, monthly change, January 2022 – August 2023, and University of Michigan Consumer Sentiment Index, monthly, January 2022 – September 2023.

Sharp-eyed readers may notice PCE was flattish in June and July. Isn’t that evidence poor sentiment discouraged spending? Perhaps—though we would note worsening moods didn’t stop folks from spending, either, as a flat read means spending stayed relatively constant. Note, too, in the next 12 months, inflation-adjusted consumer spending rose 10 times.^[iv] Clearly, record levels of consumer pessimism didn’t prove a headwind last year. If anything, this makes sentiment look coincident with, not predictive of, consumer behavior. June 2022 was also when stocks entered bear market territory—and that decline (and associated fearful headlines) probably heavily influenced sentiment.

Last year wasn’t a historical anomaly: Spending also held up following the U-Mich survey’s next three lowest readings on record. After November 2008’s 55.3, spending rose in 6 of the next 12 months—consumption wasn’t great during the throes of the global financial crisis, but it didn’t shrivel up, either.^[v] Back in 2011, sentiment plunged to 55.8 in August as debt ceiling theatrics and a US sovereign credit rating downgrade spooked consumers—yet PCE expanded in 9 of the following 12 months.^[vi] In 1980, with the US in recession and inflation in the double digits, the U-Mich poll dropped to its then-record low of 51.7 in May.^[vii] Consumer spending still rose in 9 of the next 12 months.^[viii] Here again, consumer sentiment looks much more like a coincident indicator than a gauge of what shoppers may do in the future.

In our experience, headlines and the related chatter tend to color people’s feelings about “the economy.” Those headlines slant toward pessimism and negativity, and they often crescendo when stocks are falling fast. Consider the stories dominating coverage as stocks have slid over the past couple months: rising gas prices, a potential government shutdown, auto strikes, depleted household savings, Fed speculation, a weakening dollar and rising interest rates. All the handwringing over these topics can leave folks thinking the economy is in dire straits.

Why doesn’t this attitude sway future behavior? We have found people tend to compartmentalize and separate their views of the economy from their own personal situation. Someone may think the US economy is headed off a cliff, but their personal financial situation is ok—they have the flexibility to eat out, buy a motorcycle or treat their pet to a spa day.^[ix] People may worry others are struggling since stories about businesses closing, downtowns hollowing out and workers losing jobs receive lots of attention. What goes overlooked: the firms hiring and expanding, the families taking a vacation and the folks splurging on the occasional concert. These households may think they are the exception, whereas their situation is more the norm. And besides, consumer spending tends to be much more stable than many presume, given so much of it isn’t really discretionary (think: energy, medical care, etc.).

Recognizing consumer spending is more resilient than appreciated can help investors move past concerns that today’s poor moods may hurt the economy and stocks. That, in our view, is a false fear—a brick in the wall of worry bull markets climb. That wall looks high today, and as frustrating as the past couple months have been, we think conditions today suggest the bull market has plenty of room to run.