Consumers Are Still Doing Fine
Little evidence exists that the coronavirus is significantly hurting the consumer. There have likely been changes to consumer behavior. Reports are coming in of consumers stocking up on necessities. That could be good for firms like Costco. As a side note, going to a crowded supermarket might not be ideal if you’re trying to avoid a contagious virus.
Getting the virus while trying to prepare for its impact is a terrible twist of fate. As far as the impact on the consumer, the University of Michigan’s final February confidence reading was strong.
Personally, I don’t think the consumer will have a steep drop off in spending or become significantly less confident. Judging by the time frame of the virus’ impact on America, March might be when consumer confidence takes the biggest hit (if it does take a hit). No one is sure how quickly this will spread and if it will lose its potency when the weather gets warmer.
It’s worth noting that the consumer was confident in February when the coronavirus was all over the news and impacting China greatly.
Specifics Of Consumer Sentiment Reading
Headline February sentiment reading was 101 which was up from 99.8. It was 0.1 above the preliminary reading. This was a 7.7% yearly gain because consumers were worried about the government shutdown last year. This was 0.4 away from the highest reading of the cycle which was set in March 2018. Current conditions index was up 0.4 to 114.8 and the expectations index was up from 90.5 to 92.1. Coronavirus was mentioned by just 8% of consumers.
On Monday and Tuesday, which were the last days of the February survey, the coronavirus was mentioned by 20% of consumers. Mostly because of the big decline in equities and the CDC warnings. Consumer sentiment index will likely dip if the number of consumers mentioning the coronavirus stays at that level in March or increases.
However, with a potential stock market rebound, stocks might not weigh on confidence in March. Good news is the confidence index among those mentioning the coronavirus was still just over 90. The virus will need to impact more people to get the consumers who mention it to be more negative.
As you can see from the chart below, net percentage of consumers with confidence in the government’s economic policy is high. This is good for President Trump’s chances of winning re-election. It implies consumers might not panic about the coronavirus. Trust in the government is key.
Decent January PCE Report
January PCE report showed the consumer was in fine, but unspectacular shape before the coronavirus hit. This is similar to the retail sales report. Specifically, yearly personal consumption expenditures growth fell from 4.9% to 4.5%. The comp was 0.4% harder, which means there was no change in the 2 year growth stack.
As you can see in the chart below, real consumer spending growth fell from 3.3% to 2.7%. The comp was 0.7% tougher, meaning the 2 year growth stack was up 0.1%. Disposable personal income growth rose from 3.3% to 4%, but the comp got 1.4% easier. That means the 2 year growth stack was down 0.7%.
The chart shows real disposable income growth rose from 1.8% to 2.2%. This comp was 1% easier which means the 2 year growth stack was 0.6% worse. Decline in consumption growth and the increase in spending growth helped push the savings rate up 0.4% to 7.9% which was the highest rate since April.
Inflation Isn’t An Issue
Headline PCE inflation rose from 1.5% to 1.7%. That’s the highest rate since December 2018. However, once energy starts hurting headline inflation soon, it will come down sharply. Fed doesn’t set policy based on headline inflation, so let’s move to what it does look at: core PCE inflation.
Core PCE inflation rose from 1.5% to 1.6% which was the highest rate since October 2019. With the Fed set to cut rates into a potential growth acceleration, it helps that core PCE inflation is below its goal which is 2%. Fed will be changing its goal to a range of inflation rates, but we don’t have that yet.
Core PCE inflation isn’t going to prevent the Fed’s rate cuts this year. Fed had previously stated that it would wait until last year’s cuts impact the economy before acting. But the impact the coronavirus has had on financial conditions will cause them to cut rates at their next meeting.
There is a 100% chance of a cut at their meeting in 15 days. Fed’s quiet window is starting soon. If the Fed wasn’t going to cut rates, it would be talking down markets right now to get out ahead of the window. And the Fed doesn’t like to surprise markets.
Fed Forecasts Were Wrong
For the record, those saying the Fed would cut rates because the economy was faltering to the point of it being near a recession were bailed out by the coronavirus. Their economic analysis was incorrect, but a black swan event made them correct.
This explains why any position that the Fed wouldn’t cut rates until the 2nd half and that it would only cut rates once in 2020 was so wrong. Many now see the Fed cutting rates twice in 2020, but the situation is highly fluid. If the coronavirus doesn’t become that bad and the stock market rallies to a new high after the Fed cuts rates, the futures market could come off its expectation of 3 more cuts.
Consumers had an okay January as PCE growth was solid just like the retail sales report. The consumer isn’t too concerned about the coronavirus. Even though there are some reports of consumers buying excess necessities at the supermarket. Even the consumers who mentioned the coronavirus had relatively solid confidence. Percentage mentioning the virus will probably increase in the March preliminary reading. But the overall sentiment reading won’t drop much unless the virus gets much worse.
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