Weakening Sentiment Negatively Impacting Consumer Spending

The IBD/TIPP Economic Optimism Index reported this month continues to indicate weak individual optimism. For July the IBD/TIPP Economic Optimism Index was below the neutral 50% level for the third consecutive month.

From The Blog of HORAN Capital Advisors

In addition to weakness seen in the TIPP Index, IBD notes, "the Six-Month Outlook Index fell for a third straight month, sinking 0.8 point to 44.5. That's the lowest since last September."

From The Blog of HORAN Capital Advisors

Source: IBD

In July, Confidence in Federal Economic Policies did increase three points to 44.2, but remains below the neutral 50% level. The TIPP Index is comprised of three components.

• The Six-Month Economic Outlook: a measure of how consumers feel about the economy’s prospects in the next six months.

• The Personal Financial Outlook: a measure of how Americans feel about their own finances in the next six months.

• Confidence in Federal Economic Policies: a proprietary IBD/TIPP measure of views on how government economic policies are working.

The weakness seen in this sentiment measure has carried over into other sentiment reports. The  University of Michigan Consumer Sentiment Index reading, reported a week ago, fell to 93.3 versus the prior reading of 96.1. Econoday notes, "consumer sentiment has been running very strong most of this year and often well ahead of consumer spending readings which have been flat. But today's report (July 17th) suggests that the best for confidence may already have passed (emphasis added.)

The consumer sector seems to be more discerning in its spending resulting in a decline in the change in personal consumption expenditures and a commensurate increase in the savings rate (purple line in second chart below.)

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

A result of what seems like a pullback in consumer spending is business and retail inventory to sales ratios continue to increase. Some of this build is a result of an inventory build following the disruptive issues in the first quarter. However, with a slowdown in consumer spending and potential slowing in inventory build in the economy, these two factors will have negative implications for GDP growth in the second quarter.

Lastly, earnings reports for Q2 have, so far, exceeded analyst lowered expectations. Thomson Reuters notes through July 24th, 77% of companies have reported positive EPS surprises; however, only 52% have beat on revenue. The consumer seems to have weakened through the second quarter. With the consumer accounting for about 70% of economic activity, a more positive consumer will be needed to provide economic strength in the second half of the year. Oil prices seem to be taking another leg down with many commodities following suit. These lower energy prices should begin to show up in lower gasoline prices as well and may be necessary to stimulate consumer confidence and consumer spending.