What’s happening: Goldman Sachs forecasts the August Conference Board Consumer Confidence Index, due out today, to rise 1.8 points to 97.5. This comes after three consecutive months of decline.
Meanwhile, the final results of the University of Michigan Consumer Sentiment Survey this month showed a significant increase in forecasts for the coming year.
This may sound like great news. But a closer look at the numbers reveals a more troubling picture. The problem is that wealthy Americans aren’t as excited, which could mean markets and the economy as a whole will be in even greater danger.
“High-income consumers, who bear a disproportionate share of spending, have recorded significant declines in both their current personal finances and purchase conditions for durable goods,” the Michigan researchers wrote.
Why it matters: Spending by the top 20% of workers accounted for nearly 40% of total U.S. consumer spending in 2020, according to the Bureau of Labor Statistics. And consumer spending is the most important driver of US economic growth.
Of course, there can be a difference between what people say about their feelings and what they actually do. But in this case, we’re starting to see some real impact.
This may seem positive for companies that can benefit from such changes in habits. The problem is that lower-income consumer sentiment typically lags higher-income consumer sentiment, meaning a more severe slowdown could occur.
“In an economy that is 60% dependent on services, you can see how easily this view of spending in a small group of income earners has a bigger impact on a large group of Americans,” Marvin Lo, State Street senior global macro strategist, told me. “That’s the definition of seepage down.”
“The increase we have seen over the past six weeks didn’t make much sense to me,” Loh said.
Thank you (pumpkin) latte
So far, consumers have continued to absorb the high prices of discretionary goods, but as inflation and interest rates continue to rise, some are wondering if this fall and the holiday season will be a turning point.
“We are seeing negative discretionary cash flow this year for the first time since the financial crisis of 2008-2009,” Jason English, consumer goods analyst at Goldman Sachs, said last week. Goldman estimates that discretionary cash available for the holiday season will fall 1.2% this year.
Starbucks is definitely watching. PSL has historically been a huge seasonal Online Sales Manager. In 2021, Starbucks saw a marked increase in sales the week they started selling PSL. The 10% increase in weekly sales was the biggest jump in weekly sales since spring.
And while the PSL season may be a bit lackluster this year, Goldman expects spending to pick up in the new year. They forecast consumer cash flow to grow by 6% in the second half of 2023. This is a total profit of almost 600 billion dollars, or about 110 billion lattes.
This Fed official is pleased with the fall in stocks
Markets took a beating last week — and that’s not necessarily a bad thing, according to one Fed official.
“I was really happy to see how Chairman Powell’s speech at Jacksonhall was received,” Kashkari said.
“I definitely wasn’t thrilled about the stock market going up after our last meeting of the Federal Open Market Committee,” he added. “Because I know how committed we all are to lowering inflation. And somehow I think the markets got it wrong.”
Markets fell significantly after Powell’s speech, in which he said fighting inflation would bring “some pain to households and businesses.”
The S&P 500 closed 3.4% lower on Friday, its worst day since mid-June. On Monday, he retreated again.
▸ At 10:00 am ET, the Conference board is to release US consumer confidence data for August.
▸ JOLTS jobs for July are posted at 10:00 AM ET.
On Tuesday: private sector employment US ADP; China’s official PMI; India’s GDP; earnings from Evergrande, Meitu, Brown-Forman and Designer Brands