Using Consumer Confidence to Predict a Recession

Consumer sentiment surveys near 50-year lows show growing concern over personal finances, and the latest decline has hit high earners, typically the biggest spenders, especially hard. In past downturns, the top 33% of income earners were relatively insulated, but now even this group is reporting sentiment near all-time lows. In mid-2024, high earners' sentiment fell to just 0.8 standard deviations below average, while middle and lower earners fell to 1.5 and 1.8 below. Now, top earners' sentiment has plunged to 2.7 standard deviations below average, with other groups now at around 2.4 below, an ominous sign for spending ahead. Consumers across all income groups believe buying conditions for big-ticket items like cars, homes and durables are near all-time lows -- posing a severe risk to sales and keeping discretionary revenue growth suppressed in 2H. Sentiment about consumers' financial situations over the next year has plummeted to record lows across all income groups, surpassing even 2008 and 2022. Gina Martin Adams Bloomberg Intelligence

Generally speaking, surveys of consumer confidence are not predictive of the economic outlook except at the extremes. One-month swings are usually the result of exceptional exogenous events and shouldn’t carry too much weight as the next report frequently erases the change. However, the January Consumer Confidence Index from The Conference Board should not be dismissed as a one-off. The data gathering cut-off for the survey was January 16. That was before President Trump backed down on demands to annex Greenland and withdrew threats for higher tariffs on European goods, and the killing of Renee Good. Consumers had plenty to depress confidence at the time of the survey despite some moderation in mortgage rates. However, consumers still have plenty to work about with new tariffs in the works on goods from South Korea and a deteriorating political environment at home after the shooting death of Alex Pretti on January 24. The outlook for the US economy remains highly uncertain. The Consumer Confidence index is down 9.6 points in January to 84.5, even lower than the 85.7 low of the pandemic period, and the lowest since 78.1 in February 2024. These are the sorts of readings seen during recessions and periods of jobless weak expansions. The index for the present situation is down 9.9 points to 113.7, the lowest since 110.1 in March 2021. The expectations index – which signals conditions roughly six months from now – is down 9.5 points to 65.1, the lowest since 55.4 in April 2025 when Trump’s “liberation day” announcement of heavy and broad-based tariffs reignited worries about higher prices and renewed inflation. The expectations index has not been above the 80-mark that historically points to recession since 82.2 in January 2025. If the US economy isn’t in recession, it remains vulnerable to slipping into one if consumers withdraw from their current spending. Surveys do not necessarily correlate with actual spending, however, extreme readings do usually reflect consumer behavior. Consumers are increasingly worried about their jobs and income, and their ability to meet rising costs for nondiscretionary items like food, insurance, and medical care. Spending on big ticket items like electronics and appliances, and on housing will be the first to reflect the worries. #consumerconfidenceindex Please do not use without attribution. Prepared without use of AI. Copyright © Theresa A Sheehan

Chart of the day: When the consumer speaks we should listen. The Conference Board's latest data on consumer confidence indicate a major recession head. The chart on the left depicts the relationship between the unemployment rate and the difference between the Conference Board Consumer Confidence Jobs Hard to Get Index and Jobs Plentiful Index. According to the chart, the unemployment rate should increase by 1 percentage point soon. But what is interesting about that chart is how fast the Conference Board's job assessment is deteriorating. Such a sharp increase in that index has historically coincided with the start of a deep recession. The second chart depicts the YoY change in real GDP against the YoY change in the difference between the Conference Board Present Situation Index and the Expectations Index. This chart indicates that YoY GDP growth rate should drop to 0% over by the middle of next year. PS: The difference between the present situation and expectations is a reflection of the consumer time preference. If the present situation index falls at a faster pace than the expectations index does, it means that consumers are postponing major spending. Regards, Andre Chelhot, CFA #recession #federalreserve #stagflation

It's hard to fathom, but we are back on recession watch. The economy was performing exceptionally well at the start of the year—it was the strongest economy on the planet. But here we are. In just a few months, the economy is struggling with the mounting trade war and haphazard DOGE cuts to government jobs and funding. And this is before the mass deportations get going and the Treasury debt limit drama heats up again. The odds of the economy unraveling into recession in the coming year are uncomfortably high, rising to 35%. In coming posts, I will present the leading indicators I rely most on to determine whether a recession is dead ahead.   Leading indicator #1 – Conference Board survey of consumer confidence. Most times, consumer confidence reflects the economy’s performance – unemployment and inflation – but in the lead-up to recessions, the causality shifts and a sharp decline in confidence causes consumers to pull back on their spending, and a recession ensues. Recession is ultimately a loss of faith – consumers lose faith they will have a job and thus stop spending, and businesses lose faith they will be able to sell what they make and begin laying off workers. Historically, when consumer confidence falls by more than 20 points in a 3-month period, consumers have lost faith, they curtail their spending, and a recession starts within 6 months. Confidence has slid since late last year, but not to the point that it says recession. Not yet.   #recession #consumerconfidence

Consumers tend to spot changes in their local economies before it shows up in the official data. People know about the factories opening, the help-wanted signs, or conversely the store closures in their local economies. This happens before these openings are filled as payrolls, for example. At any rate, see our nearby figure, which plots the Conference Board's present situation index against the growth in employment. Consumer attitudes about the present situation tend to foreshadow changes in employment by a few months. The latest data are reason for concern: the present situation index is 12.3pts below its year-ago level. Historically, this has coincided with weaker payroll growth. The drop in consumer confidence, especially around current economic conditions, is worth following.

Consumer confidence has just dropped to a 4 year low, what will its potential impact on both the US economy and Commercial Real Estate be? Today was the March release of the long-running survey of consumer confidence, and it fell to 92.9 this month, from 100.1 in February. Why this is important is that the US GDP is 70% driven by consumer spending, and when consumers grow pessimistic, and feelings of potential individual financial fear and uncertainty grow, they will pull back on spending. A pull back on spending at best will just lead to a slowing economy, but often can lead to a recession. Further evidence of this can be found in today’s report within the so-called expectations index — which measures how people think the economy will look six months from now — which tumbled to 65.2 from 74.8. That’s the weakest reading since 2013. A sustained reading below 80 tends to signal a recession. How this will likely impact commercial real estate is two fold: 1.) Any economic recession will lead to some degree of deteriorating financial performance and operations of commercial real estate properties. A pull back on spending will impact retail and hospitality. Job loss will impact multifamily and office. Overall economic contraction will hurt industrial, etc. Any degrading of operations will bring values down further. however… 2.) A slowing economy, let alone an actual contraction, based on historical precedence will bring down treasuries, fed funds, and overall borrowing costs. When borrowing costs come down, buyers can pay more for the same property, and thus values tend to go up. This push/pull dynamic will be interesting to watch in the event this drop in consumer confidence actually ends up leading to a recession. Not only should you be educated on all of the activity happening at a national level and how it can affect real estate, make sure to be communicating this to existing and potential clients. Adding value is the most important responsibility of a service provider to the client, and helping make sense of everything that is happening for clients adds value.

Consumer Sentiment Collapses as Inflation Expectations Surge The U.S. consumer is growing more pessimistic, and today’s data makes that clear. The University of Michigan’s Consumer Sentiment Index fell sharply to 64.7 in February, a 9.8% decline from January and a 15.9% drop from a year ago. Every major component of the index worsened, with consumers reporting weaker confidence in both current conditions and future expectations. The deterioration was widespread across income and age groups, signaling a broad-based decline in optimism about the economy. The timing of this drop is significant. Consumer sentiment had been improving in recent months, and businesses were hoping that momentum would continue into 2025. Instead, today’s report shows a steep reversal, with concerns about personal finances, economic conditions, and inflation weighing on households. One of the biggest drivers of this decline was a 19% plunge in buying conditions for durable goods, largely due to fears that tariffs will drive up prices. Consumers are already adjusting their behavior in anticipation of higher costs, a trend that could have ripple effects across industries. At the same time, inflation expectations are rising at an alarming rate. The one-year inflation expectation jumped from 3.3% to 4.3%, the highest since November 2023. The five-year outlook rose from 3.2% to 3.5%, marking the largest month-over-month increase since 2021. These shifts matter because inflation expectations influence real economic decisions. If consumers believe prices will continue rising, they may change their spending habits, demand higher wages, or delay major purchases. This, in turn, can complicate the Federal Reserve’s path forward on interest rates, as the central bank has been looking for stable inflation expectations before considering rate cuts. Today’s report also aligns with the other economic data we’ve seen this morning, reinforcing a broader theme of economic uncertainty. The services sector contracted for the first time in over two years, existing home sales fell sharply, and now consumer sentiment has cratered. The combination of these factors suggests that momentum in the economy may be shifting. If consumer confidence continues to deteriorate, spending could slow, business investment could weaken, and economic growth could stall. At Havas Edge, we track these shifts closely because consumer confidence is one of the most important leading indicators of economic behavior. When sentiment turns, spending patterns follow. Understanding these changes early allows businesses to adapt, ensuring that strategies remain relevant in an evolving market. #ConsumerSentiment #Inflation #Economy #FederalReserve #ConsumerBehavior

Trade Wars and the Fragility of Consumer Confidence "All parents argue from time to time. But the wise ones know better than to drag their children into the fray. The affairs of nations are no different. Diplomacy, when it fails, too often gives way to force—war, as Clausewitz warned, is simply the continuation of policy by other means. But in this era of trade wars, the battlefield isn’t distant. It’s the supermarket aisle, the energy bill, the rising cost of breakfast. When leaders forget the art of quiet diplomacy, consumers—like children caught in an adult conflict—naturally react." Record-high coffee prices have now made their way through the supply chain and landed squarely on the consumer’s lap—at a particularly inopportune time. This moment may serve as a real-world test of the long-held theory that demand for coffee is inelastic. Inflation expectations are rising dramatically. Consumers’ year-ahead inflation outlook surged from 5.0% in March to 6.7% in April—the highest level since 1981, during the peak of the last hyperinflation cycle. Consumer Sentiment, as measured by the University of Michigan, fell for the fourth consecutive month, plunging 11% from March. Interviews were conducted between March 25 and April 8, just before the partial reversal of tariffs on April 9. The downtrend in sentiment is now both pervasive and unanimous—cutting across age, income, education level, and political affiliation. Since December 2024, sentiment has dropped over 30%, largely driven by growing concerns about escalating trade tensions. Recession warning signs are flashing. Consumers are increasingly expecting unemployment to rise over the next year—marking the highest level of such expectations since 2009, during the depths of the global financial crisis. The rise in long-run inflation expectations—from 4.1% in March to 4.4% in April—was especially pronounced among political independents, suggesting broad-based unease that transcends partisanship.

American consumers confidence plunges amid sweeping tariffs in effect The number one keyword that everyone needs to focus on in this tumultuous time is confidence. A lack of confidence from businesses, the financial markets, and consumers alike can become a vicious cycle that can push an economy into a recession. The financial markets have already cast their vote of no confidence in the current tariff policy and the escalating trade war between the U.S. and China, as both the dollar and bond yields have dropped significantly. Following the release of the University of Michigan consumer confidence data, American consumers have also shown a vote of no confidence. The index has fallen to its lowest level since 2022, while short-term inflation expectations have risen to their highest levels since the 1980s. We will soon receive more data on business confidence. However, given the current level of uncertainty, we should expect a sharp decline in business sentiment—likely resulting in a significant pullback in capital expenditures. This drop in market confidence is one of the main reasons we believe the probability of a recession in the next 12 months is now much higher than it was just three months ago. The final piece of the puzzle—and perhaps the biggest question on everyone’s mind—is: “How will the Fed react?” As things stand, we believe the Fed will have to prioritize controlling inflation over addressing unemployment, as both inflation and inflation expectations risk spiraling out of control.