US consumers remain under pressure as sentiment slides
Current consumer sentiment in the U.S. has hit rock bottom, which typically would indicate a slowdown in spending; however, the high-income segment continues to drive demand. Per the full note from ING, consumer confidence is faltering due to weak wage growth, high fuel prices, and job security concerns, with the latest University of Michigan sentiment index dropping to 46.3. Despite these challenges, high-income households are maintaining expenditure patterns, a phenomenon supported by wealth gains and job stability that sets a K-shaped recovery narrative in play. This situation suggests that the forex market may see increased volatility as consumer spending dynamics diverge from classic sentiment indicators, with much depending on how the lower-income brackets react moving forward.
What the desk is arguing
The desk suggests that the disconnect between consumer sentiment and spending patterns, particularly among high-income households, is pivotal to understanding current market dynamics. As highlighted by ING, the notable drop in consumer confidence, now at a historical low, does not seem to affect spending at the upper end of the income scale, reinforcing a K-shaped recovery narrative.
Supporting data indicates that 73% of respondents feel it is a bad time to purchase major appliances, while 87% think the same about home buying. This is a significant sentiment shift that historically would correlate to reduced spending; however, high-income households, constituting a large portion of consumer expenditure, likely cushion the economy.
Where it sits in our coverage
Our consensus target for USD/EUR stands at 1.075, with a range from 1.04 to 1.12. Some notable firm targets include:
This view aligns with jpmorgan, supporting the higher end of the spread based on robust spending behavior from affluent consumers, diverging from the cautious outlook observed in bofa's forecast.
How other firms see it
Firms like jpmorgan and citi see continued strength in high-income spending, suggesting a stable yet volatile market. Conversely, bofa maintains a more pessimistic view, expecting greater economic headwinds.
Key indicators to watch include U.S. GDP growth rates and upcoming Federal Reserve statements that may reflect on consumer sentiment as well as retail spending data, which will give insight into how broader economic factors are affecting consumer behavior.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Consumer confidence hits historical lows with sentiment index at 46.3.
- 02High-income households continue to drive spending despite concerns about job security.
- 03K-shaped recovery narrative is unfolding as spending behavior diverges significantly across income brackets.
- 04Impending economic data releases may trigger increased forex volatility.
Market implications
Traders should monitor spending reports and GDP forecasts over the coming weeks, especially as consumer behaviors evolve. A key level to watch in USD/EUR would be the 1.075 region, as movements near this mark could signal shifts in market sentiment influenced by updated consumer data.
Risks to this view
An unexpected surge in inflation or a tightening of monetary policy by the Federal Reserve could disrupt spending patterns, forcing a readjustment in the current sentiment landscape. This reversal could bring about volatility in USD/EUR dynamics as consumer confidence may be further compromised.
Older quick take Quick take Published 15:24 United States US consumers remain under pressure as sentiment slides Consumer confidence remains under pressure from weak wage growth, high motor fuel costs and worries about job security. However, spending is holding up, reflecting the growing dominance of high-income households, who are in a much stronger financial position High-income households are maintaining spending, despite weak consumer confidence Sentiment slide would normally be bad news for spending... Today's data flow has produced very weak University of Michigan sentiment, falling to 46.3 in October from 48.1.
This is the second-weakest reading of all time (the weakest being in May of this year). Current conditions exhibited the greater pain, falling to 44.7 from 50.9, which is a new low and doesn't bode well for Republicans in the mid-terms. High gasoline prices, weak income growth and job security all remain the key themes with steep falls seen in all the "good time to buy..." categories. 73% think it is a bad time to buy a major household appliance, 78% think it is a bad time to buy a vehicle and 87% think it is a bad time to buy a home.
Consumer confidence and spending Source: Macrobond, ING "> Source: Macrobond, ING But high income households keep the K-shaped consumer narrative in play Does this matter for growth? Well, the relationship between spending and sentiment has broken down over the past couple of years, primarily because of the K-shaped consumer story. High-income households are the key driver of spending behaviour, with the Bureau of Labor Statistics suggesting the top 20% of households by income (those making over $155k per year) are responsible for around 40% of all consumer spending, while Moody's Analytics suggest it could be as much as 60%.
This group has high-paying jobs, a greater sense of job security and has been boosted by huge wealth gains over recent years. The median American (reflected in the sentiment surveys) doesn't have the wealth gains to support their spending in an environment where real household disposable incomes are barely growing in a low-hire, low-fire economy – Federal Reserve data suggests the bottom 60% of households by income hold only 15% of US household wealth. So, as long as equity markets hold up, spending can keep going.
Hopefully, that buys time for an improvement in the energy situation that provides relief in terms of lower motor fuel costs and improved job prospects for the broader household sector. But if we were to experience a stock market correction, then the situation would change quickly. US Spending Sentiment Confidence Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Knightley Chief International Economist, US Older quick take
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