Investors say the great American consumer is about to hit a wall

(Bloomberg) — After avoiding a recession for longer than many thought possible, the American consumer is finally on the brink of collapse, according to Bloomberg’s latest Markets Live Pulse poll.

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More than half of the 526 respondents to the survey said personal consumption — the most important driver of economic growth — will contract in early 2024, which would be the first quarterly decline since the start of the pandemic. Another 21% said the reversal would happen sooner, in the last quarter of this year, as higher borrowing costs hit household budgets while Covid-era savings plummet.

This result contrasts with the optimism that prevailed in US stock markets during most of the summer, as slowing inflation and low unemployment boosted hopes of a so-called soft landing. If the economy stops growing – a very likely scenario if consumer spending contracts – it could mean more downside for stocks, which have already retreated from their highs in late July.

“The prospect of a soft landing, lower inflation, the end of Fed tightening, peak interest rates, a stabilizing dollar, stabilizing oil prices — all of these things helped push the market higher,” says Alec Young, chief investment strategist at MAPsignals. . . “If the market loses confidence in this scenario, the stocks are at risk.”

“It’s not sustainable”

Right now, the US economy appears to be accelerating rather than stopping. Growth is expected to accelerate in the third quarter on the back of the recent rise in household spending, which jumped in July by the most in six months.

For some analysts, it looks like the final giveaway.

“The big question is: Is this power in consumption sustainable?” says Anna Wong, chief U.S. economist at Bloomberg Economics, who expects a recession to begin by the end of the year. “It’s not sustainable, because it’s driven by these one-time factors” — particularly summer bingeing on blockbuster movies and concert tours.

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The continued strength of the US labor market has supported household spending in the face of the largest price increases in decades. That has prompted some analysts to push back their recession forecasts — or even scrap them altogether.

Economists at Goldman Sachs Group. We expect the consumer to outperform again in 2024 — and to keep the economy growing — amid steady job growth and wage increases that beat inflation.

“Really struggling”

But there are plenty of headwinds on the horizon.

Researchers at the Federal Reserve Bank of San Francisco say the excess savings that helped consumers ride out price hikes will run out in the current quarter — a sentiment with which three-quarters of respondents to the MLIV Pulse survey agreed.

“There is a growing problem that the lower end of the income and wealth spectrum is actually suffering from the inflation that has accumulated in the last couple of years,” while wealthier Americans remain protected from savings and rising asset values, said Thomas Simons, US economist at Jefferies. .

He added that overall, consumers were able to bend under the weight of rising prices. “But there will come a point where that is no longer possible.”

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Delinquency rates on credit cards and car loans are on the rise, as families feel the financial pressure after the Federal Reserve raised interest rates by more than five percentage points.

Another type of debt — student loans — is about to come due again for millions of Americans who took advantage of a payment freeze due to the pandemic.

A majority of investors in the MLIV Pulse survey cited declining credit availability and rising costs — mortgage rates are near their highest levels in two decades — as the biggest hurdle for consumers in the coming months.

About three-quarters of survey respondents said auto or retail stocks are most vulnerable to a decline in excess savings and a tightening of consumer credit — a concern that has not been fully priced in by markets. While General Motors and Ford Motor Company. Essentially missing from the broader stock rally this year, Tesla Inc. More than double the value.

“It just takes longer.”

With the fate of the economy hinging on what American consumers do next, investors are looking everywhere for the answer.

When asked what they considered a good leading indicator, MLIV Pulse respondents pointed to everything from more standard measures — such as retail sales or credit card delinquencies — to airline reservations, pet adoptions, and use of “buy now, pay later” installment plans. .

This may be because conventional evidence has often proven unreliable amid the turmoil of the past few years.

“The traditional rules of the game of the economy and markets are challenging in this post-pandemic environment,” said Keith Lerner, co-chief investment officer at Truist Wealth. “Things take longer to finish.”

The MLIV Pulse survey of Bloomberg News readers is conducted on the platform and online on a weekly basis by the Bloomberg’s Markets Live team, who also runs the MLIV blog. This week, the MLIV Pulse poll asks if investors have fully regained the confidence in UK assets that they lost during the short-lived premiership of Liz Truss. Click here to share your views.

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