RiskJanuary 6, 2022

Uh-Oh, Consumers’ Confidence Fades, So Their Spending Should, Too, Economist Says

Natixis’ Lavorgna says people’s current high outlays can’t stay that way for long.

Reported by Larry Light

A frenzy of consumer spending has powered the market’s advance and gross domestic product (GDP) growth. But the weird thing is that consumer confidence is falling.

Result: Expect a collapse in consumption, as people cut back on their willy-nilly purchases. That’s the conclusion of Joseph Lavorgna, Natixis’ chief economist, Americas. It’s telling that confidence diverges widely from folks’ spending on stuff, he declared in a research note.

“Consumer confidence is a leading indicator of economic activity, and points to a dramatic decline in consumption,” Lavorgna said.

Last year, demand rose 3.3% above the level of 2019’s final quarter, a time right before the pandemic hit. And the bulk of the increase was for goods, such as home furnishings and autos, as coronavirus restrictions and general wariness combined with government stimulus and rising savings to make people eager buyers. The yen for goods has been a stark contrast to the marked downturn in spending on services, such as air travel and restaurants.

“An outsized contribution from goods purchases over the last year is a key reason why we expect a big payback on spending thus year,” Lavorgna explained. Already, the explosion in goods buying has propelled their prices upward, a big factor in the current explosion in inflation.

In 2021’s third quarter, US consumption of services, which did pick up a bit last year until the Omicron variant appeared, was 1.5% beneath its pre-pandemic level. Purchases of goods then surged 15%, according to the Brookings Institution. In December, though, consumer confidence was way down, off 12.5% from the year before, per the University of Michigan sentiment index. Hence, goods are about to join services, by Lavorgna’s reasoning.

Time was, he wrote, that consumer confidence dovetailed with spending. “The tight correlation makes sense because households typically spend when they are confident about the current economic backdrop and what they expect the future to hold,” he observed.

Consumer spending, whether on goods or services, usually makes up about 70% of GDP. Should services maintain their depressed showing and goods purchase take a dive with them, the upshot won’t be pretty for the economy, in Lavorgna’s view.

“Our best guess is that the level of consumption will collapse to meet the level of confidence, not the other way around,” he contended.