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Consumer Sends Mixed Signals in the Fourth Quarter

| January 09, 2019

Consumer spending represents approximately two-thirds of US economic output. Therefore, economists track consumer activity and sentiment indicators closely when creating economic forecasts. However, in the fourth quarter the consumer data may be sending mixed signals.

Retail sales continued its strong upward trend through the first 11 months (most recent data available) of 2018 increasing 3.99%. In addition, all indications are that holiday spending was quite robust which should be supportive of the fourth quarter economic growth data.

However, consumer attitudes started to wane in the fourth quarter. Both the University of Michigan Consumer Sentiment and the Conference Board Consumer Confidence surveys show that consumer attitudes peaked earlier in the year. This survey data is often used as an indicator of future consumer spending. As a contrarian indicator the data often peaks near economic peaks and bottoms near economic bottoms. Therefore, a decline from a previous  high  could be a sign of economic  weakness to come. On the other hand, weaker consumer survey data may simply be a reflection of the recent turmoil in the financial markets.

In fact, a deeper dive into the data shows that many consumers are concerned about a decline in the overall economic conditions. Meanwhile, most consumer spending expectations remain fairly high. In addition, expectations of future price increases remain stable.

So while consumer spending remains strong consumer attitudes are being negatively impacted by concerns about the future rate of economic growth. The challenge is that should enough consumers begin to fear an economic slowdown it may become a self-fulfilling prophecy as weaker consumer spending may lead to weaker economic growth. This relationship also shows how financial market volatility and political uncertainty can feed through to the real economy by impacting consumer attitudes and activity.