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A sign showing the divergent directions of consumer spending and consumer savings

Putting Consumer Spending Trends in Context

The end of 2022 saw inflation slowing, unemployment low, and stocks finishing strong, leading many to release a sigh of relief. Bearish analysts began to talk about the US dodging a long feared recession while the bulls on Wall Street crowed over their vindication.

It appeared as though we might be out of the woods. But handpicking data points that make us feel warm and fuzzy could have us missing the forest for the trees.

Serial entrepreneur, executive fellow at Harvard Business school, and an occasional guest on Shark Tank Matt Higgins recently had this to say about the subject.

Source: CNN

Higgins makes some valid points here. We’ve written before about how the backdrop to 2008 was very different than the climate we’ve been navigating since the COVID-19 pandemic. Different scenery, however, doesn’t necessary change the plot trajectory. By understanding what the data points he references mean and how they interact, we get a better sense of the road ahead.

Defining Consumer Spending, Sentiment, and Debt

As you wade through the wide world of economic data points, you quickly learn that many are interconnected. Those connections, however, rarely rise to the level of causation. Even data sets you might assume are highly correlated don’t always pan out that way.

Numbers failing to behave the way we expect does not mean that holding them relative to one another is a fool’s errand. Instead of viewing those connections as straight lines, it may be more productive to think of them as colors in a painting. Definitions of terminology provide structure while the contrast between hues shapes the picture.

Consumer sentiment attempts to reflect how Americans feel their personal finance will fare in the next six months. The most frequently cited data is provided monthly by the University of Michigan. Though the terms are often used interchangeably, consumer sentiment and confidence measure different things. According to US Bancorp Asset Management:

The Consumer Confidence questions place a greater emphasis on employment and labor market conditions while the Consumer Sentiment survey emphasizes individual household finances. This drives the iepression Consumer Confidence more generally reflects consumer feelings towards the overall economy while Consumer Sentiment reflects consumer perceptions of their own personal circumstances.

Consumer spending refers to the how much Americans are spending in a given time frame. Also known as Personal Consumer Expenditures (PCE), it ultimately represents consumer sentiment in action.

The problem is that consumer spending sometimes incorporates accumulation of debt. This means the subsequent consumer spending data comes with an asterix. It shows that consumers are willing to spend money without accounting for the fact that they will have considerably less money to spend over time as they attempt to pay off their debt.

How Lopsided Data Tracks with Recessions

Sometimes navigating the future means looking to the past. To this end, looking at how data behaved before, during, and after a past recession holds merit. The best example? In acknowledgement of Higgins’ own comparisons, we turn to 2008.

By June, the S&P 500 was down 12% year-over-year and the GDP annual growth rate was down more than 80% from the year prior. In the meantime, consumer spending saw a nearly 5% jump. Technical recession definitions tell us that the economic pain persisted through July of 2009, but it would not be until May of 2011 that consumer sentiment returned to its 2007 high. Unsurprisingly, it was around that time that we finally saw both a significant drop in total consumer debt and a substantial increase in consumer saving rates relative to 2007.

Consumers were spending despite a downturn. They were also accumulating debt and depleting their savings accounts. It would not be until debt and American savings restabilized that we would see consumer sentiment and spending getting back to normal in step with the stock market.

What the Data is Telling Us Now

When holding all of this information to the light, two key takeaways emerge.

First, looking at one measurement alone on a short-term basis generates a skewed perspective on economic performance and trends. To extend the art analogy before, this type of tunnel vision is akin to looking at one dot in a pointilism painting. As George Seurat would likely tell you, that’s no way to see the big picture.

George Seurat's famous pointillism painting, "A Sunday on La Grande Jatte". One point here, like one economic data point, doesn't give you the whole picture.

Second, the current economic picture is not as rosy as the Wall Street bulls would like you to belief. Past performance may not be indicative of future results, but it can be instructive when evaluating all the data in that bigger picture. Decimated savings paired with a trend of robust consumer spending tells us that, much like we saw with the 2008 recession, Americans will likely be tightening their belts as 2023 progresses. If, as Higgins states, consumer spending accounts for 70% of our GDP, that tightening may have a significant impact on retail, real estate, and more.

In other words: we are not out of the woods we seem to be missing for the statistical trees just yet.

What this Means for Investors, Entrepreneurs, and Consumers

Contemplating a recession, especially after thinking it had been avoided, can be scary. Investors may grow concerned about portfolio performance. A potential drop in consumer spending may have entrepreneurs anxious over the impact on their revenue. Consumers still struggling with the price of eggs may grow skittish as they eye their personal finances.

On all fronts, the best bet is likely to hope for the best but prepare for the worst. Though you certainly shouldn’t act from a place from panic, there are steps you can take to brace yourself for an economic shock. From reevaluating risk exposure in your investment holdings to redoubling efforts to growing your savings while limiting spending, options abound. It is advisable, however, to seek the guidance of a professional before you make your move.

At the end of the day, we don’t have a crystal ball. It is entirely possible that the economy will get the surge of energy we’re all hoping for right now. Understanding the data reflecting the economy, however, is the best way to make sure you’re not caught unaware.

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©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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