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Consumer optimism has fallen sharply - Mckinsey & Co Survey
Pessimism has become a contagion.
Grab a coffee, grab a drink, or put your feet up and relax as we explore the psychology of a recession, how pessimism affects the consumer and the economy, and BNPL (Buy now, Pay later) could be on shaky ground.
In my first write-up on SubStack, I spoke about the Psychology of investing and how it impacts you as an investor. Here’s a link to the post, and if you’ve not signed up, consider doing so.
I spoke of how the consumer must “feel” as though they are in a recession or “feel” as though things are getting “worse”. Here’s an excerpt
Mckinsey & Co survey
Well, it would seem as though negative sentiments are beginning to manifest across all levels of consumers. This was one of the key findings in Mckinsey’s fourth semiannual edition of the ‘American Opportunity Survey’ (AOS).
The data looks at four surveys - April & Nov 2021 and April & Nov 2022.
The consumer was still optimistic during the first two surveys conducted in 2021. This is expected as it takes time for the impact of inflation and rising interest rates to be "felt" by the consumer.
Notice we are talking about feelings. You must understand that consumers look to the future by judging how they feel in the moment. If the stock market is making new highs, fat bonuses are being paid, and your house value is increasing, you will feel optimistic about the future.
The issue is that we cannot predict the future, but the consumer reflects on the future based on what is happening today! The stock market is different, and that is why the market will always turn up quicker than you can catch the bottom.
Unlike previous surveys, optimism has been cut across the board - all income levels, genders, and ages, but the sharpest cut was amongst 25 to 34-year-olds.
The report opines on potential reasons for the increase in pessimism.
- The 25 to the 34-year-old group may have been saving to buy a home, and interest rates have risen to the highest over a decade. Many predicated their future in a 0% or low % interest rate environment.
- Older Americans are on fixed incomes and are sensitive to price increases in everyday expenses.
- The wealthy many have endured the earlier shifting economic tide; however, their buffers are beginning to shrink - retirement accounts or stock portfolios.
Let's dig deeper and look at how sentiment varied across different demographics.
The 25 - 34-year-old has been hit hard. We discussed how a rising rate environment could impact their home buying. When the recession comes around, there may also be fewer jobs available for them; however, US labour statistics would counter this argument for now.
Interestingly, they are the largest user group of BNPL (Buy now, Pay later) alongside 35 - 44-year-olds. How will this affect the BNPL market over the short term? This could present an exciting opportunity to short companies with overexposure to this industry.
Returning to the survey, Look at how quickly sentiment changed for people earning over $100,000. It was the most significant drop in the whole survey.
As bad as this is going to sound, this is the kind of "feeling" we need to help reset expectations. If every income level, and every demographic, is beginning to adjust their spending habits, then the economy is beginning to cool.
Inflation and rising costs are already being talked about but expect this to ramp up as pessimism becomes more deep-rooted across all people. The news will perpetuate this, becoming the topic of small chat and feeding into demand destruction. This will also spur a deflation called the 'Deflationary Spiral'. More on this later.
Remember, this part is essential - Consumers and people will judge the future based on today. If all demographics feel lousy today, this will eventually show up in economic metrics; however, they are lagging indicators, and the market looks forward.
On the topic of spending, let's look at the last survey Exhibit.
Here are findings from the report that relate to spending habits:
- A notable increase in spending on essentials such as groceries, utilities, transportation, housing, and healthcare
- Those with lower incomes have slashed discretionary spending and, in some cases, essentials.
- 19% of American households are spending less on groceries; for those making less than $50,000 annually, 23% say they have cut their grocery budget. By contrast, just 12% of those making more than $100,000 annually have cut back.
- Cash buffers from the stimulus checks are running low among low-income households, Americans increasingly resort to drawing down savings and running up credit card debt.
- 24% of respondents saw a decrease in their debt payments or savings, a 4% increase in the past six months.
I will add my own observations and thoughts below:
- Restaurants are f***ed. I suspect many layoffs. Again, this is typical for a recession (Could be bullish for server robots; welcome Japanese-style dining.)
- Mental Health spending is interesting. I think both the increased spending by some and the decreased spending by others are bullish for mental-health telemedicine. We could extend this reasoning to general healthcare as rising costs breeds opportunity for cost savings.
- I expect clothing retailers to be walloped and could present another opportunity to short the industry, perhaps through a retail ETF.
- With such a dramatic rise in spending on Groceries, Utilities, and Energy, the consumer has to cut back elsewhere. Savings and debt payments will be the direct casualty; BNPL is part of this group.
- Persistent Energy inflation bodes exceptionally well for Clean Energy, Battery storage technology, EVs, and Energy democratisation. Please note that this is tricky, and I am speaking very broadly.
Inflation and Wages
The report also had a small note on inflation and wages. Here's what they had to say:
At least there was some optimism, but this doesn't help the FED's mandate. I believe jobs will be the final stand. Once we see a deterioration in employment figures, that will be the last piece of bad news the market needs to look forward into the future.
Deflationary Spiral
You may or may not know there are many types of Deflation, and believe it or not; there is also good and bad deflation.
Good deflation is when technology allows products, processes, and services to be cheaper, more affordable, or more efficient.
A type of bad deflation is when people stop spending money because they believe things will get worse or cheaper, but it doesn't manifest how they envisage spurring a stagnant economy.
I will leave you with this definition of 'Deflationary Spiral' from Investopedia.
Concluding Remarks
Pessimism is spreading, and this is fulfilling the FED's mandate. Spending on Energy, Utilities, and Groceries remains stubbornly high, meaning other areas will suffer. BNPL may come under a lot of pressure in the short-term and clothing retailers.
The jobs market is strong, and we need that to fall, which will be the last straw.
BNPL may be f***ed in the short term.
Psychology affects markets, and the sentiment is turning sour across the board. We could see a rise in the manifestation of Deflationary Spiral effects.
McKinsey & Company
Inflation-weary Americans are increasingly pessimistic about the economy
High prices and low expectations: The job market still may be strong, but lingering economic conditions are taking a toll on the outlook of American households.
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