U.S./China (and now Mexico) trade concerns continue to unsettle equity markets and have sent 10-year U.S. Treasury yields to a 20 month low. But, in the real economy, could consumers provide a buffer against economic slowdown?
1. U.S. consumer confidence may not yet fully reflect trade war implications – and is not matched by actual consumer expenditure.
The Conference Board’s measure of U.S. consumer confidence rebounded from 129.2 in April to 134.1 in May, its highest level for many years and well above economists’ expectations (page 2). So U.S. consumers still appear unfazed by the possibility of a prolonged trade war with China; they expect both U.S. business conditions and the U.S. labor market to continue to improve. But there are two underlying questions here. First, are U.S. consumers fully aware of what could lie ahead? The cutoff date for the survey was May 15, before the recent escalation in political and market concerns; higher tariffs have also yet to fully filter through into higher domestic prices, perhaps in part due to a weaker CNY (outlook on page 9). The second question is to what extent higher levels of U.S. consumer confidence translate into greater actual consumer spending: as we also note on page 2, growth of the personal expenditure component of U.S. GDP has fallen back and retail sales growth has also declined markedly from its July 2018 highs.
2. European consumer confidence contrasts with industry worries, sluggish regional economies and political uncertainty.
Consumers also still appear confident in Europe, despite the Eurozone’s continuing economic and political woes. Recent evidence of this includes a 3.4% YoY rise in private loans in April and an increase in M3 money supply that month. Eurozone services sentiment also picked up in May (page 3). In France, helped too by fiscal stimulus measures, consumer confidence has now risen for the fifth consecutive month. But there must be concerns here too. Industrial confidence is still low in most of the Eurozone, not helped by fears around slowing global trade growth and the impact of U.S. policy on specific sectors (e.g. autos).
3. Limited progress towards a trade solution will likely prompt further market volatility: recalibrate equity allocations.
So while continued U.S. and Eurozone confidence may provide some buffer against economic slowdown, it cannot prevent it. The impact of the U.S./China trade dispute on levels of economic activity will be more muted and less immediate than on financial markets, but it will be appreciable. We forecast a slowdown in U.S. growth to 2.5% this year and only modest Eurozone growth (1.2%). And, in the next few months, given our expectations of only slow progress towards a trade solution, we expect further market volatility. So we deepen our previous call to take profits and recalibrate with a suggested further reduction in equity allocations. Things could get worse before they get better.
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