Politicians in America seem to be doing their best to derail the gradual upward trend in consumer confidence that has been in play since the deepest darkest days of the GFC. Some of the biggest retracements in that upward trend have been related to the various fiscal crises that have occurred in recent times, starting with the 2011 debt ceiling debate (and subsequent credit rating downgrade by Standard & Poor’s).
This time is no different. Consumer confidence fell from an upwardly
revised 80.2 in September to 71.2 in October, a steeper than expected drop
based on average market expectations.
This result was surveyed during the moments of greatest political
intransigence over the month and doesn’t capture the ultimate (albeit short-term)
As I said a couple of weeks ago, the big
question for me about the impact of the latest bout of political brinkmanship
was not the direct impact of the partial government shutdown, but rather the
impact on business and consumer confidence and spending, investment and hiring
decisions. This result does not bode
well for December quarter private consumption expenditure (PCE).
That said it’s interesting to note that
while the current economic conditions component of the survey fell from 73.5 to
70.7 over the month, the future expectations component fell from 84.7 to
71.5. It is current economic conditions
which has a greater impact on consumer’s immediate spending intentions so it
remains to be seen the extent to which the drop in confidence translates into
real spending decisions. Of course that
also depends on the extent to which we see a rerun of the political shenanigans
later this year and/or early next year.
In terms of the impact on GDP, todays
September retail sales report was actually a bit stronger than an initial
glance suggests. Total sales fell 0.1%
in the month but after excluding automotive and gasoline, sales were up a more
robust 0.4%. Sales are still a respectable 3.2% up on year ago levels. The September result has me still comfortable
with my expectations of third quarter PCE growth broadly in line with the
growth rate of 1.8% we saw in the second quarter.
I have lowered my PCE expectations for the
fourth quarter on the back of recent events I still expect it to be modestly
higher than the third quarter at 2.2%. While politics will likely throw further bouts
of uncertainty and volatility into the consumption story, we continue to expect
consumer confidence to trend higher over time, largely on the back of the
continued improvement in the housing market.