Very Strong May Consumer Confidence Reading

Consumers Might Actually Be Confident

In previous articles, I mentioned that consumer confidence might wane because of the newly enacted tariffs and the stock market correction. Consumer confidence is highly impacted by the stock market. That being said, a 5.5% decline isn’t a huge deal since consumers don’t follow stocks every day. My assertion might have been wrong since the Cornerstone Macro consumer sentiment index rebounded in the week of May 24th. Similarly, the Conference Board index increased from 129.2 to 134.1 which beat the consensus for 129.9. This is the best reading since November. It’s hovering near 18-year highs.

The survey period in that index ended on May 16th. Trump’s 25% tariff on $200 billion in Chinese goods was announced on May 10th. Maybe consumers need to feel the impact of tariffs, which will start affecting them in June, to react negatively too them. Also, if the stock market’s correction hits 10%, consumers will definitely get more pessimistic. From the close on May 16th to May 29th, the S&P 500 fell 3.24% which means much of this correction wasn’t included in the survey. As you can see from the chart below, 42% of consumers think stocks will increase in the next year and only 22.2% think stocks will decrease. This reading is directly related to how stocks are doing as consumers in this survey are subject to extreme hindsight bias.

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Consumers Confident About The Labor Market

Let’s get into the details of this great consumer confidence report. The present situations index increased from 169 to 175.2. All the bears love to claim that’s bad news, but it’s actually good news for retail sales. Consumers being confident isn’t bad just because this index has been high prior to recessions. There needs to be a negative catalyst that hurts the consumer for there to be a recession. I’m not expressing a positive opinion on the economy; I’m just saying this isn’t a negative. It will be interesting to see if the Fed uses the positive consumer sentiment readings and the strong labor market to justify maintaining rates this year. That would scare the stock market which would hurt consumer confidence.

The expectations index increased from 102.7 to 106.6. Expectations are extremely high which is why I don’t buy the narrative that the present situation index being higher than the expectations index is a problem. Speaking of the labor market, this report supported the recent good jobless claims reports. The percentage of consumer saying jobs are plentiful increased from 46.5% to 47.2%. That was a cycle high. The only other higher readings since 1967 were in the 1990s. The percentage of consumer saying jobs are hard to get fell from 13.3% to 10.9%. The percentage of consumers expecting more jobs in the next 6 months increased from 16.7% to 19.2% and those expecting fewer jobs fell from 13.2% to 12.5%. Optimism about the labor market is prevalent. That should help May retail sales.

One part of the consumer confidence reading that wasn’t positive was the confidence expressed by those under the age of 35. As you can see from the chart below, it fell sharply to 120.3 which is the weakest reading since September 2016. This index is volatile, so this decline might not mean anything. My best guess is this is related to the increase in auto loan delinquencies. If your auto loan is delinquent, you won’t have positive sentiment.  

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Investors Are Confident

Investor sentiment readings are only valuable at extreme points. Also, they can become worthless pretty quickly. Any sentiment reading that shows investors were confident in early May supports the correction, but doesn’t tell you what to do now because it’s highly likely investor sentiment has weakened in the past couple weeks.

Specifically, the State Street investor confidence index increased from 72.9 to 79.5 in May. This sentiment reading is based on actual institutional clients’ portfolios. Confidence in North American stocks increased 5.4 points to 76.7. In European stocks, it increased 5.9 points to 92.5. Finally, in Asian stocks, it fell 4.2 points to 88.4. The Shanghai Composite has outperformed the S&P 500 in the past 3 weeks.

Redbook, MBA Applications, & Jobless Claims

Redbook same store sales growth in the week of May 25th was 5.7% which increased from 5.2%. This supports the strong consumer confidence report. However, this report has been strong all year, yet the retail sales data has been lumpy.

In the week of May 24th, the MBA mortgage applications index fell 3.3% week over week after rising 2.4% in the previous week. The good news is this weakness was mainly catalyzed by the refinance index which fell 6% after rising 8% in the previous week. The more important purchase index fell just 1% after falling 2%. Don’t let those weekly results fool you though as the yearly growth was still a solid 7%.  

Jobless claims in the week of May 25th were solid again as claims increased from 212,000 to 215,000. The 4-week average fell from 220,500 to 216,750. It’s clear that the burst in claims in late April and early May was temporary. The leading economic indicators index won’t be hurt by jobless claims, but it will be hurt by the stock market which fell about 5% in May. I expect yearly growth in that index to continue to falter. Continuing claims in the week of May 18th fell 26,000 just as I projected last week. The 4-week average fell to 1.673 million.

Conclusion

The past few articles I’ve done have been about how weak the economy is. It’s nice to see some positives. The consumer is optimistic, Redbook same store sales growth was solid, yearly MBA purchase applications growth was strong, and jobless claims were low. The only weak stat I mentioned was sentiment among consumers under the age of 35, but that’s a volatile stat. I think the housing market will continue to show signs of recovering in the summer. Yes, housing price growth has fallen, but new home sales have improved. The economy needs housing to drive growth because most of it is headed in the wrong direction.