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Bruno Cavalier
Chief Economist at ODDO BHF

While businesses are being prompted to cut their spending by uncertainty, households are consuming at a constant rate. This stability is keeping total growth anchored and is reflecting income growth, particularly that from labour. But it is also being driven by a high degree of confidence, which has returned to its pre-financial crisis levels. With more confidence, consumers are better able to smooth income by drawing on savings and credit. That said, households are less optimistic on future  conditions than at the end of the 1990s. This is guaranteeing a certain level of caution which reduces the risk of a correction.

The week's focus

For the last year, the slowdown in US growth has largely been due to business spending. Household consumption is volatile in the short term but around a solid trend. Again this year, there seems to be a residual seasonality with significant momentum in Q2/Q3, following a soft patch in Q4/Q1. On this basis, we will need to take a cautious approach to interpreting a slowdown in consumption in the next few months. The Atlanta Fed anticipates an increase in personal spending of only +1.7% (annualised) in Q4. But leaving these slip-ups aside, the consumption trend has been fairly stable since 2015 (lhs chart). This reflects a solid increase in income and a high level of confidence. What can be said about this confidence specifically? To assess it, we have three key sources, two monthly (University of Michigan, Conference Board) and one weekly (Bloomberg). The three indices, once normalised, are above their historical average (rhs chart). As a rule, they show a similar level but for the last 12 months or more, a dispersion has emerged, which generates a realignment risk (but it is not clear in which direction). The UoM index is currently the lowest and also the most volatile. The Bloomberg index is the highest although it has eroded of late. The CB index, between the two, largely reflects employment conditions. An explanation of the gaps may be found in the weight given to conditions going forward. We note that households are very optimistic on the current situation, but their view of the future, although positive, is below the heights reached in the second half of the 1990s. This may be no bad thing given that this period (it was the time of the “new economy”) spawned excessively high expectations, which were then unfulfilled. When confidence is too high, it may signal that households are incorrectly assessing their income prospects and run the risk of reducing their savings too much. This is not the case at the moment. The savings rate is above its average (8.3% vs 7.3%). The solid consumption pace thus stands more chance of being sustainable.

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