Q4’s Market Drop: Effects On The US Consumer

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Q4’s Market Drop: Effects On The US Consumer

The New York Federal Reserve runs a monthly consumer panel, asking respondents questions about their inflation expectations along with their views on labor market conditions and the state of personal household finances. The approach they take is somewhat different from classic surveys. Rather than a one-shot deal, households stay in the panel for a year. This allows for a more consistent measure of how expectations are changing among the same respondents. We like that approach and regularly scan the data for differentiated economic insight.

Here are some data highlights from the December 2018 survey (link at the end of this section if you want to see the complete rundown with accompanying charts):

Inflation/Home Prices:

  • The median expectation is for 3.0% inflation over the next 1 and 3 years. One-year expectations have been very steady at this level for over a year; three-year forward expectations have been declining modestly.
  • Expectations for home price increases over the next 1-3 years at 4.3%-3.9% are down to their lowest levels since the survey started in 2013.

Upshot: inflation expectations remain “well anchored” at 3.0% even though core CPI is 2.2% and TIPS breakeven rates predict 10-year future inflation of 1.9%. That’s good news for Fed policymakers; the US consumer is far from a deflationary mindset. On the downside, lower expectations for future home price increases could ding consumer confidence if they continue to slide.

Labor Market Conditions:

  • Respondents expect their personal wages to rise by a median 2.9% over the next year. Importantly, there has been no increase to this expectation over the past year despite reported wage gains in the monthly Employment Situation Report.
  • Respondents feel quite confident that they will not lose their job; they give only 13.8% odds of a forced separation, lower than the 14.9% chance they gave at the start of 2018.
  • There has been a surge, however, in their concerns over higher unemployment rates a year from now. Respondents put the odds of a higher jobless rate in 12 month’s time at 38.8%, up from 32.4% at the start of 2018.

Upshot: the NY Fed’s consumer panel feels secure in both their immediate job security and the potential for wage gains. At the same time, their view of future conditions has deteriorated sharply, likely due to the signaling effect of lower stock prices during Q4 2018.

Household Finances:

  • Respondents are fairly sanguine about their one-year future household income growth, estimating it at +2.9% – one of the highest readings since 2013.
  • At the same time, they expect to spend 3.5% more in the next 12 months. On the plus side for the US economy, that is higher than the 2.9% they reported at the start of 2018. On the downside for household cash flow, it is obviously higher than their expected growth in either wages or household incomes.
  • The panel reports a high degree of confidence that they can make at least the minimum payment on their personal debt over the next 3 months. They place the odds of not being able to do so at 12.0%, down from 12.3% at the start of 2018 and 14.9% in January 2017.
  • Respondents are not as positive on the stock market (remember this data was collected in December 2018), with only 39.6% thinking equities will be higher a year from now. A telling point: the readings here have never breached 50% since the start of the survey in 2013.

Upshot: households feel very good about their immediate finances. They plan to spend more than they expect to see in wage increases. Their perceived ability to make minimum debt payments is high as well.

Wrapping this up with 2 observations:

#1: The Q4 stock market swoon did not meaningfully dent respondents’ confidence in their economic future. The areas of weakness – expected future unemployment rates, for example – should improve if equity markets sustain their current recovery.

#2: The Federal Reserve is in a stronger position with US households than it is with financial markets. Inflation expectations among consumers are almost a full percentage point hotter than either the official government data or bond markets predict. That gives the Fed some leeway on rates (which they used this month). And while global equity markets think Chair Powell flubbed his lines in Q4, the typical household did not seem to notice much. All that should be reassuring to the Fed as they seek to strike a balance between Main and Wall Streets.

Link: https://www.newyorkfed.org/microeconomics/sce#indicators/household-finance/g11