The consumer is the single largest sector of the economy, making up 69% of GDP. A solid pace of consumer spending is central to our broader outlook that the economy will slow but not dip into recession. Watching consumer confidence is a timely way of tracking household economic health. Currently, multiple factors are supporting consumer confidence, which remains near cycle highs.
In particular, the Conference Board’s measure has averaged 128.1 so far this year, just below its 19-year high. A strong labor market is one of the most important supports for the consumer’s optimistic outlook, which is what ultimately dictates consumer spending. Asset prices have also helped bolster household sentiment so far this year.
Risks loom, however. Recent volatility that afflicted Wall Street has not passed through to Main Street. Yet households are not immune to policy uncertainty. In January, the government shutdown knocked consumer confidence down to 15-month lows. The next round of tariffs, scheduled to take effect shortly, will include a wider range of consumer goods and essentially serves as a tax on households. Finally, the biggest risk is that businesses become adversely impacted by policy uncertainty and put the brakes on new hires, or even resort to layoffs. If consumers go into bunker mode and cut back spending, the risk that the entire economy falls into a recession increases sharply.
Our single favorite indicator of consumer sentiment is a simple spread between the Conference Board’s present situations and expectations components. Historically, this has had a good track record of timing the start of a recession. At present, this spread rests near cycle highs. We will be watching this measure to see whether households are radically cutting back spending, which could put the entire economic expansion at risk.
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