A recent chart from UBS has caught my attention. It indicates a surprising reluctance among Americans to spend during the upcoming holiday season, especially when compared to their willingness in July.
A year ago, a similar trend was noted. Subsequently, US retail sales declined by 1.3% in November and 0.7% in December. If history repeats itself this year, fears of another recession will loom larger.
Several spending indicators currently look more precarious than they did last year. To begin with, the era of surplus savings seems to be drawing to a close. Estimates suggest that only the top 20 percent of earners still have a buffer of Covid-era savings. For the majority, the fiscal cushion is thinning.
Interest rates, too, are a growing concern. Consider the 30-year mortgage rate, which currently hovers 1.5 percentage points above last year's figures. Granted, not every homeowner will grapple with these elevated rates. But for those who do, the financial strain is palpable. Beyond mortgages, consumers are also grappling with exorbitant interest rates on credit cards and car loans.
Then there's the labor market. Although it remains relatively robust, the fervor once associated with it has diminished. Recent job growth has been less than 200,000 over the last quarter – a trend usually signaling a slowdown in growth. This time last year, the job growth was twice that rate.
Additionally, waning consumer confidence, partly attributed to rising fuel prices, cannot be ignored. While consumer confidence might not always directly correlate with spending behaviors, it is certainly a factor worth considering, especially when viewed in conjunction with the aforementioned issues.
An echo of 2018?
All this brings to mind the unexpected events of late 2018. In December of that year, retail sales plunged by an unforeseen 2.5 percent - the steepest drop since records began in 1992. While a full-blown recession was averted, with the US economy eking out growth of just under 0.2 percent for the quarter, the jolt to investor confidence was undeniable. The S&P 500 Index experienced a sharp decline, dipping by over 9 percent in that month alone, having plummeted by as much as 14 percent earlier.
Given the current economic climate and bearing that UBS chart in mind, I can't help but feel a sense of déjà vu. Investors and consumers alike should brace for potentially turbulent times ahead.
Jeroen Blokland is the founder of True Insights, a platform offering independent research to craft diversified multi-asset portfolios. Previously, he headed multi-assets at Robeco. His weekly chart insights feature every Monday on Investment Officer Luxembourg.
