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What Can Consumer Surveys Tell Us About Recession Risks?

If you look at a lot of economic data these days, you’d think U.S. households are pretty happy. Jobs are plentiful, wages are up, home valuations are up, and data suggests that during Covid, households added over $2 trillion to savings, meaning balance sheets are strong. So, it’s really no surprise that consumer spending continues to set new record levels (Chart 1).

Chart 1: Data shows U.S. households look to be in better shape than ever with strong jobs, wage growth and wealth leading to record consumption

Percent change chart

It seems that consumers are feeling pretty good right now. But if you look at consumer confidence surveys, that’s not what they show.

Consumer surveys say…

There are two well-followed national surveys of consumer confidence: the Conference Board’s and the University of Michigan’s, and they typically move in tandem (Chart 2).

Right now, neither are near all-time highs. Instead, both have been trending down.

Chart 2: Despite household strength, consumer confidence surveys are trending down

Confidence and sentiment chart

Since Covid, the surveys have also started to differ significantly. The University of Michigan survey is much more negative on the economy than the Conference Board survey. In fact, we’ve typically only seen levels like this in the past around recessions.

To be fair, the questions each survey asks are a little different. Although both ask about business conditions, the Michigan survey asks about personal finances and large purchase plans, while the Conference Board asks about employment prospects.

But given that spending is at record levels, GDP is running at 3.6% p.a. and unemployment is at 3.6% – all historically pretty strong – such low readings from consumers seem a little out of place.

Inflation is driving down Consumer Sentiment

What is interesting is to compare the more negative University of Michigan survey results to another index of “unhappiness” known as the Misery Index.

The “Misery Index” is typically calculated by adding the unemployment rate and inflation rate. The theory being that households will be less happy if they can’t buy as much with their old wages and even less happy if they don’t have a job.

Notably, this index doesn’t actually ask people how they feel. And yet, when you line it up-side-down against the Michigan Consumer Survey, the two almost perfectly align (Chart 3).

So, what is driving the Misery Index up? Inflation, which recently hit a 40-year high of 8.5%, pushed the Misery Index to 12.2%, its highest reading since 2011.

That suggests that today’s high inflation also likely explains why consumer confidence is falling and has pushed the University of Michigan index near record lows.

In other words, even though inflation doesn’t slow spending and can actually help wages and home prices rise, people still count it as having a very negative impact on their future.

Chart 3: Comparison with the Misery Index indicates rising inflation weighs a lot on consumers

Misery index vs sentiment

Why is Consumer Sentiment so important?

Consumption drives around 70% of the US GDP, so knowing whether it is likely to go up or down is important for companies planning investments and inventory, as well as economists forecasting GDP.

Consumer confidence has historically reflected pretty well how strong consumer spending would be (Chart 4). So, these metrics are important indicators of the strength of the economy.

Chart 4: Covid has broken down the typical relationship between spending and sentiment

Real consumer spending growth vs sentiment

However, we see a big disconnect right now – where spending is at record levels and climbing (green line), but consumer confidence is weak and falling (red line).

Clearly, this time is different. Part of the reason spending is so strong is all the Covid benefits, which have resulted in a reported $2 trillion-plus of excess savings. That’s equivalent to 15% of annual consumer spending last year.

The Misery Index is also different this time.

  • When it was last at 10%, the unemployment rate was high (at 6%), and inflation was relatively low (at 4%). Arguably being jobless is worse than having inflation.
  • This time, unemployment is low (3.6%) and inflation is high (8.5%), especially for things everyone needs like gas (up 53% since last April) and rent (up 15%), both of which have dramatically outpaced wage growth (up 5%). In fact, a lot of the recent growth in spending is accounted for by higher prices (not more purchases).

What might this mean about recession risks?

Intuitively, low confidence indicates that spending will slow, leading eventually to a recession. But actual spending data seems to suggest consumers are still willing to support demand and keep GDP growing, making a recession less likely. These results are still unclear.

A recent Nordea study suggested the simple divergence in the two surveys might actually be a better indicator of recession. They replot the data from Chart 2 on a single axis (below). Because the Conference Board measure has higher highs and lower lows, you see periods where the Conference Board runs at a premium to the Michigan data –as we are seeing right now (Chart 5).

Historically, that happened before recessions.

Chart 5: Conference board score tends to be at a premium to the Michigan survey before recessions

Consumer confidence and sentiment

Before you start to panic, there are two important things to note:

  1. These divergences can last for years before a recession hits, as was the case in the mid-1990s and ahead of the pandemic-induced recession. That’s consistent with the lead times indicated by yield curve inversions too.
  2. Recession-level sentiment is historically positive for stock returns. When the index is below 74 (one standard deviation below its average of 86), the average S&P 500 return over the following 12 months averages 13%. While if the index is above 98.5 (one standard deviation above average), the average S&P return is just 8%.

In short, although consumer surveys are normally quite useful barometers of future GDP strength, the Covid stimulus makes this traditional indicator harder to interpret in 2022. Instead, what we see in actual GDP and spending data is that the economy is still pretty strong. It seems this time around, consumer confidence is more affected by the inflation problem, which the University of Michigan survey reflects better.

This time, what matters more to GDP is how the Fed tackles inflation and how quickly higher rates slow the economy and spending. An influential study suggests we should expect a lag of around two years, which is actually pretty consistent with what Chart 5 shows too.

Michael Normyle, U.S. Economist at Nasdaq, contributed to this article.

Phil Mackintosh


Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

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