US sentiment underlines K-shaped consumer strife
The desk views the recent improvement in U.S. consumer sentiment, reflected in the University of Michigan's sentiment index which rose to 48.9, as a sign of a K-shaped recovery detached from actual spending trends. Per the full note from ing-think, while sentiment shows marginal recovery from its lows, particularly among higher-income households, overall consumer spending reflects broader economic challenges faced by the median demographic, particularly amidst stagnant real income. Big wealth gains among the top 20% of earners, who now account for over 60% of all spending according to Moody's Analytics, contrast sharply with the struggles of the median American who continues to experience rising costs against declining income. With no immediate market-moving events on the calendar, the current dynamics point to a potential for heightened market volatility influenced by this disparity in financial health among consumers.
What the desk is arguing
The desk frames the current U.S. consumer sentiment as indicative of a K-shaped economic recovery, where disparate financial conditions are leading to uneven spending behavior. Recent data indicates that while sentiment has improved, it remains fundamentally tenuous, with the latest University of Michigan index suggesting projected consumer spending may decline by around 1.5% year-on-year due to ongoing economic pressures for the median household.
Additionally, the stark divide where high-income households dominate consumer expenditure is underscored by BLS data indicating that the top earners account for over 40% of all spending. Moody's analysis takes this further, highlighting that these affluent households are now responsible for over 60% of spending, which starkly contrasts with the sentiment of lower-income groups that are increasingly burdened by high prices and low income growth.
Where it sits in our coverage
Currently, our coverage suggests a consensus target for the relevant pairing around 1.075 with a range from 1.04 to 1.12. Specific forecasts include: - jpmorgan - 1.10 (Mar26) - bofa - 1.04 (Mar26)
The desk's outlook appears to align towards the upper end of the current range, reflecting a cautious optimism in the wake of higher-income driven spending, despite the broader economic headwinds.
How other firms see it
Firms such as jpmorgan are aligned with the current sentiment, reflecting a similar cautious optimism about spending trends influenced by high-income households. Conversely, bofa presents a more conservative view, positioning against an uptick in spending due to ongoing economic strains impacting the median consumer.
In this context, watching the USD/JPY trajectory against the backdrop of U.S. economic sentiment may yield relevant insights as the disparities in consumer spending influenced by wealth dynamics continue to unfold.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Consumer sentiment shows slight improvement but remains weak, suggesting broader economic challenges.
- 02The disparity in spending between high-income and median earners highlights a K-shaped recovery.
- 03The top 20% of households now account for over 60% of consumer spending, complicating economic outlooks.
- 04No immediate market-moving events are on the horizon to influence this sentiment.
Market implications
Traders should monitor the USD/JPY pair closely given the current sentiment dynamics, particularly if volatility increases as spending patterns evolve. A break beyond the 1.10 level could indicate stronger growth, whereas a fall below 1.04 may reflect deeper economic concerns arising from consumer confidence.
Risks to this view
If real income growth unexpectedly rebounds or inflation measures stabilize, there could be a significant shift in spending patterns, potentially invalidating the current bearish sentiment on lower-income consumer prospects. Additionally, an unforeseen economic stimulus or fiscal policy shift could alter spending habits dramatically.
Older quick take Quick take 16:05 United States US sentiment underlines K-shaped consumer strife Consumer sentiment is off its lows, but remains very weak. However, the relationship with spending has been poor recently, reflecting the growing influence of higher-income households who have seen their finances boosted by surging property and stock market wealth US consumer sentiment has improved but remains at very weak levels Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Knightley Chief International Economist, US Sentiment gets a lift, but remains weak The University of Michigan sentiment index has improved to 48.9 from 44.8 (consensus 46.0), but this remains at very weak levels by historical standards. The chart below suggests the latest reading should be consistent with consumer spending falling around 1.5% year-on-year.
However, consumer spending is being driven by higher-income households who are buoyed by big wealth gains, whereas sentiment reflects the median American. Unfortunately, they are seemingly finding the current economic situation much more challenging. Consumer confidence & spending 1970-2026 High income households are driving the growth in spending Bureau for Labor Statistics data suggests the top 20% of households by income (those making $155k or more based on 2024 numbers) account for more than 40% of all spending.
Moody's Analytics suggests the skew towards high-income households is even greater, with their data indicating that the top 20% are currently accounting for more than 60% of all consumer spending! Consumer confidence reflects the median household, which is much more concerned about weak income growth and high prices – remember that real household disposable income has fallen for three straight months. Federal Reserve data also shows that the bottom 60% of households by income, which obviously includes the median person, only hold 15% of the wealth of America.
As such, the surge in stock and property prices has not had the same positive boost as for high-income households who hold 70% of the wealth. Unemployment fears & US jobs Cooling inflation expectations dampens rate hike prospects Today’s survey also suggests there is real concern about job security, with a net 54% of respondents expecting unemployment to rise over the next 12 months. That reading is on a par with the readings experienced during the Global Financial Crisis and the early 1990s recession.
In better news for the Federal Reserve, inflation expectations receded, with the 1Y ahead reading dropping to 4.6% from 4.8% (consensus 4.9%), while 5-10Y ahead dropped to 3.4% from 3.9%. Today’s moves in oil prices on the back of positive news on the prospect of a deal to reopen the Strait of Hormuz, suggest that retail gasoline prices could drop back below $4/gallon next week, having recently been as high as $4.60/gallon. This should mean further declines in both market and consumer inflation expectations, which would remove a key argument that hawks use to justify calls for higher US interest rates.
We expect the Federal Reserve to hold rates steady next week and not hike at all in this cycle, as we outlined in our FOMC preview . US Spending 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.
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