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Diagnosing the Health of the Consumer 

Kristina Hooper 

The Upshot 

12/2/2013 

Kristina Hooper offers a snapshot of the consumer heading into the holiday season, highlighting progress in the wake of a government shutdown and the keys to further upside.
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Kristina Hooper, US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

Consumers are gaining confidence just in time for the holiday season. But it will take more than a few doorbusters to get them back on track.

Sentiment took a huge hit during the government shutdown and debt-ceiling debate, prompting many Americans to pare their expectations for the future. However, some recent data shows US consumers are becoming more optimistic about economic conditions. Heading into the most important time of year for consumer spending, let’s take a look at where this vital segment of the economy stands.

Shaking Off a Shutdown

By most metrics, we’re seeing some improvement in consumer sentiment. The University of Michigan’s consumer sentiment index climbed to 75.1, beating estimates, and outpacing the 73.2 reading in October. In particular, consumers’ future expectations improved considerably. It was one of the first signs that the consumer psyche, rocked by the shutdown and fiscal impasse in Washington, is on the mend.

Meanwhile, Bloomberg’s consumer comfort index for the week ended Nov. 24 came in at -33.7, a slight uptick from -34.6 the previous week. That marked its highest level in seven weeks, and the best reading we’ve seen heading into the holiday-shopping season since 2007.

But keep in mind that consumer comfort is far below where it was during the week of Black Friday in 2007. And it’s only slightly higher than where it was at this time a year ago. Indeed, consumers have a long way to go. The University of Michigan’s consumer-sentiment reading remains below its pre-shutdown level of 77.5.

Plus, not all consumer-sentiment measures are showing an attitude adjustment. The Conference Board’s November consumer confidence index dropped to 70.4, well below consensus and its previous reading. Much of the decline can be attributed to the expectations component, which continued its drop—albeit more slowly. However, there tends to be a lot of volatility in the expectations component.

Wealth Effect

A Spending Spirit?

In addition to signs of a consumer who is more willing to spend, we’re starting to see a consumer who is more able to spend. Consumer net worth, as measured by the Fed’s net worth for households and non-profit groups, rose 1.8% in the second quarter—an increase of $1.34 trillion to $74.8 trillion. In fact, household net worth is now higher than its pre-recession peak of $68.1 trillion in the third quarter of 2007. This trend suggests there’s potential for improved sentiment and spending created by a “wealth effect,” whereby higher home prices and stock prices fuel consumer confidence. The Fed has been keenly focused on this concept, even mentioning it in its most recent FOMC minutes.

Separately, the cost of paying off debt has fallen in recent years, thanks to deleveraging and lower interest rates, despite a rise in rates when the Fed introduced the idea of tapering asset purchases earlier this year.

Today, there are two potential catalysts that might make consumers more willing to spend in the near term: a continued decrease in gas prices and improvement in the labor market.”
Today, there are two potential catalysts that might make consumers more willing to spend in the near term: a continued decrease in gas prices and improvement in the labor market. Gas prices have fallen significantly recently, to the point where they appear to be reducing consumers’ short-term inflation expectations. Two of the reasons for this drop are the US-Iran accord and the increase in US shale oil drilling, which has US refiners producing more diesel for export to Europe and Asia. In turn, that has led to more available gasoline for domestic consumption as part of the refining process. Both factors could continue to drive gas prices lower in the near term.

But even more important is the job market. We’ve seen only a slight improvement in consumers’ view of current job-market conditions, according to the Conference Board. Still, its outlook for the number of jobs available in the next six months deteriorated. Look to Friday’s employment report for signs of whether the labor market is moving in the right direction. Improvement in the employment situation could mean that recent strides in consumer confidence might lead to a positive surprise in the holiday‑shopping season.



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Thomson Reuters/University of Michigan Surveys of Consumers is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 in December 1964. At least 500 telephone interviews are conducted each month of a continental United States sample (Alaska and Hawaii are excluded). Five core questions are asked.

Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.


A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
 
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 

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