Consumer Confidence Is Shot

Since early last summer I have been very focused on surging costs and their impact on the consumer. My view on the consumer part of the economy has consistently been more dire than the economic consensus. Since the consumer makes up approximately two thirds of economic activity, this jaundiced observation has led me to the conclusion that a consumer led recession is a likely outcome within the next 12 months. That view has been reinforced in recent weeks and a troubled consumer is starting to show up in some key first quarter earnings reports. This week the stocks of both Walmart and Target have tumbled after very disappointing results. One can certainly quibble that the poor numbers were the result of inflation's impact on profit margins at these two retail behemoths. Walmart's sales were up 4% from a year ago, nicely above consensus even as profitability was lower than anticipated. However, with recent CPI readings up over 8% and PPI hovering above 11%, this tells me sales volumes were actually down on a year-over-year basis, which one would expect given my pessimistic view of most consumer segments. Inflation has come in over average wage gains in this country for 13 straight months now. This has led to the worst consumer confidence levels in more than a decade, and a big reason more than three quarters of those polled believe the nation is heading in the wrong direction. Hardly a positive omen for consumer spending and confidence in coming months. The big downturn in equities this year is likely to have a negative impact on the 'wealth effect' which is concentrated in the higher end income segments. The fact is that the consumer is tapped out and this is before gasoline hits six bucks a gallon this summer as some Wall Street firms are predicting. In April of 2020, the average national savings rate hit over 30% thanks to government largess and the fact there was little to spend money on given how much of economy was in lock down mode. In March of this year, that savings rate had shrunk to a tad over 6% of income, in-line with the historical averages of the past decade. Those savings rates are likely to be drawn down further through the end of the year as inflation levels will take time to take to the medicine currently being prescribed via higher interest rates from the Federal Reserve. The 'cure' is likely to have some nasty side effects, which could very well include a recession. Consumers have little hope of additional congressional relief funding into the mid-terms. They have increasingly turned to their credit cards to sustain spending. Credit card debit has risen much faster than expected in recent months. At some point a good portion of the consumer base is going to have no choice but to hunker down and curtail spending to just the essentials. Consumers are not alone in their pessimism. According to a new Conference Board report, CEO confidence is now negative for the first time during the economic expansion with 68% of leaders surveyed projecting that current Fed policy is going to trigger a recession. It seems I have more and more company around my pessimistic view for the economy. I actually prefer to be lonely as this view means more market volatility and economic pressure in the months ahead. Until things start to improve for the average consumer, it is hard to see significant upward moves for either the markets or economic activity. (Walmart is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells WMT? Learn more now.)

Consumer Confidence Is Shot

Until things start to improve for the average consumer, it is hard to see significant upward moves for either the markets or economic activity.

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