Deutsche Bank economist Torsten Sløk doesn’t think US consumers are worried about a recession.
And this is what matters.
In an email on Friday after a round of economic data that was received negatively by markets, Sløk said that while he continues to have discussions with clients about the possibility of a recession, the average American isn’t worried about this risk.
Citing Google Search trends — which you could quibble with, but at least it’s something — Sløk said that in 2007 the US consumer seemed to be onto something going awry before the recession really broke out.
Now? There’s hardly any interest.
Here’s Sløk’s commentary in full:
Over the past six months I have heard more clients say that that despite strong nonfarm payrolls we will soon have a recession. Call it the Groundhog Day recession call. Eventually we will get a recession but the question is if a recession is just around the corner. The market chatter about a coming recession has been intensifying since 2014 when China was slowing and oil prices started falling and the dollar started rising and credit spreads started widening. The key discussion issue is how significant these forces are and most importantly, whether falling oil prices is good or bad for the US economy. Given these worries in markets it is worthwhile looking at whether people outside financial markets worry about a coming recession. The chart below shows US-based Google search interest in the word “Recession.” In mid-2007 consumers were good at anticipating the coming recession, which started in December 2007. But looking at the most recent data, there are few signs that people outside financial markets are particularly worried about a recession. It makes sense because we are after all seeing job growth near 300,000.
Sløk, we’d note, has been one of the most bullish economists out there for some time and maintained this stance as more and more commentary from Wall Street pounds the table on risks standing in the way of continued US economic progress and the impact this could have on financial markets.
For one thing, American manufacturing appears to be in a clear recessionary environment, but this sector ultimately accounts for about 12% of GDP. Consumption trends are still strong and Friday’s retail sales report, which on the surface looks weak, actually indicated continued strength from US consumers beneath the headlines figures.
As George Pearkes at Bespoke Investment Group noted, year-over-year sales at every type of store except gas stations, electronics stores, and retail locations saw solid increases.
And while of course it matters to employees at, say, Macy’s and Best Buy if sales are moving from these stores to Amazon or online outlets, for example, this is more indicative of a change in consumer behaviour more than an inability for consumers to spend any more money.
One of the most influential post-crisis books to be published was Atif Mian and Amir Sufi’s “House of Debt,” which argued that what really led the US into recession wasn’t just an overheating of home prices but the way homeowners borrowed against these home values and eventually got themselves too stretched financially.
And so as US consumers began rolling over — cutting out all kinds of purchases in favour of paying debts (and then, in large numbers, eventually defaulting on those debts) — so too went the US economy.
This all matters now because while there are clearly pockets of weakness in the US economy — manufacturing, for one — employment trends are still strong and consumer spending, while undergoing some secular changes in terms of where and how people spend their money, is still very much alive.
Additionally, financial markets are clearly stressed out right now. This, of course, matters.
Certainly some outside forces like a hard-landing in China could bleed into the US economy and stall growth for a period, or worse. And moreover, it is always true to say there will be a recession because that is how time works.
But the heart of the economy is the US consumer and consumers are simply not giving up the ghost.