(Bloomberg) — After avoiding a recession for longer than many thought possible, American consumers are finally on the verge of collapse, according to the latest Bloomberg Markets Live Pulse poll.
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More than half of the 526 respondents 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 a reversal would happen sooner, in the final quarter of this year, as higher borrowing costs weigh on household balance sheets while Covid-era savings decline.
This finding runs counter to the optimism that prevailed in US stock markets through much of the summer, as slowing inflation and falling unemployment rates raised hopes for a so-called soft landing. If the economy stops growing — a very likely scenario if consumer spending shrinks — that could mean more downside for stocks, which have already pulled back from their highs in late July.
“The prospect of a soft landing, lower inflation, the end of Fed tightening, peak interest rates, a stable 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, 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 in July jumped by the most in six months.
For some analysts, it looks like the last 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” – most notably 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 Inc. expect That the consumer will outperform again in 2024 – and keep the economy growing – amid steady job growth and wage increases that beat inflation.
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 struggling with 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 Co. have essentially missed out on a broader stock rally this year, Tesla has more than doubled in 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-platform and online weekly by Bloomberg’s Markets Live team, which also runs the MLIV blog. This week, the MLIV Pulse Poll asks whether investors have fully regained the confidence in UK assets they lost during Liz Truss’s short-lived prime ministership. Click here to share your views.
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