Podcast Summary: Thoughts on the Market Episode: Shaky U.S. Consumer Confidence May Be a Leading Signal
Host: Morgan Stanley (Andrew Sheats)
Release Date: February 27, 2025

Introduction

In the February 27, 2025 episode of Thoughts on the Market, Morgan Stanley's Andrew Sheats delves into the current state of U.S. consumer confidence and its potential implications for the broader economy and financial markets. Building on previous discussions about corporate confidence and government policy uncertainty, Sheats shifts focus to the consumer side, highlighting recent survey data and expert opinions.

Decline in Consumer Confidence

Sheats begins by underscoring the profound impact that consumer confidence wields over economic and financial landscapes. He emphasizes that confidence can "trump almost everything else," shaping consumer behavior regardless of present economic conditions or price considerations.

"Confidence is an extremely powerful psychological force in the economy and financial markets." (00:45)

Two pivotal surveys have recently signaled a sharp decline in U.S. consumer confidence:

1. University of Michigan Monthly Survey:

   • Findings: A noticeable drop in consumer confidence accompanied by a rise in expected inflation.
   • Relevance: The survey specifically inquires about the influence of government economic policies on consumer confidence, revealing a "precipitous decline" over the past month. (01:30)

2. Conference Board Survey:

   • Findings: Similar trends to the University of Michigan survey, with consumers expressing increased worry about the future despite stable current conditions.
   • Implications: Indicates a growing sense of uncertainty and reduced optimism among consumers regarding economic prospects. (01:55)

Impact of Government Policy Uncertainty

Sheats links the recent dip in consumer confidence to a series of U.S. policy actions, suggesting that the flurry of governmental initiatives may be contributing to the unease among consumers. This connection is supported by the timing of the confidence drop, which coincides with recent policy changes.

"There’s at least circumstantial evidence that the flurry of recent U.S. policy actions may be playing a role." (02:15)

Soft Data vs. Hard Economic Indicators

A key point in the discussion is the distinction between soft data (like consumer confidence surveys) and hard economic data (such as actual sales figures). Sheats explains that while soft data may appear less concrete, it holds significant predictive power for future economic trends.

"They potentially do something that other data cannot." (02:40)

Investors pay close attention to these surveys because financial markets often act in anticipation of future economic shifts. Positive or negative expectations can lead to market movements even before hard data reflects these changes.

Implications for Growth and Investment

The erosion of consumer confidence has broader implications:

• Economic Growth: Sluggish consumer optimism may lead to reduced spending, slowing economic growth.
• Investment Behavior: Lower confidence can result in decreased corporate investment and a more conservative approach to deal-making.
• Inflation Expectations: Persistent concerns about inflation can further dampen consumer and business sentiment. (02:55)

Morgan Stanley's economists align with the survey findings, forecasting slower growth and persistent inflation over the next 18 months. In response, the firm anticipates lower bond yields across the U.S. and Europe, reflecting ongoing growth uncertainties.

"Morgan Stanley continues to forecast lower bond yields across the US And Europe on the expectation that uncertainties around growth will persist." (03:20)

Implications for Credit Investors

For those involved in credit markets, declining consumer confidence presents a dual-edged scenario:

• Stability of Credit Markets: Credit markets have remained relatively stable compared to other asset classes.
• Potential Risks: Continued deterioration in consumer confidence could signal broader economic challenges, making credit investments riskier despite an ostensibly "easier policy path." (03:35)

Sheats advises that further declines in consumer confidence should be viewed negatively due to their potential to hinder economic growth, even if they might lead to more accommodative monetary policies.

Conclusion

Andrew Sheats wraps up the episode by reiterating the critical role of consumer confidence as a leading indicator in economic forecasting. The recent downturn in U.S. consumer optimism, as evidenced by key surveys, suggests cautious times ahead for both the economy and financial markets.

"Less confidence remains a double edged sword... we would view further deterioration in confidence as a negative given the implications for growth." (03:35)

Listeners are encouraged to stay informed and consider the insights shared when evaluating market conditions and investment strategies.

Note: The episode concludes with a standard informational disclaimer, underscoring that the content is not financial advice and may not be suitable for all listeners.

"The preceding content is informational only and based on information available when created. It is not an offer or solicitation..." (03:44)