- Business and consumer confidence have recently deteriorated after a strong 2018
- Levels are still high, but the trend is worrying
- Continued falls would imply a longer and deeper downturn in 2019
One of the peculiar developments for much of 2018 was that, while broad money growth slowed substantially (something we reviewed here and here), both business and consumer confidence were holding up. Admittedly, monetary trends have a longer lead than confidence, but the resilience in sentiment was nevertheless remarkable.
However, towards the end of 2018, confidence began to weaken in the major economies. Leaving aside the UK, where it is difficult to judge how much falling confidence is due to a deteriorating outlook and how much it is due to the ever-increasing likelihood of a no-deal ‘hard’ Brexit (which, in turn, could of course also be a driver of the deteriorating outlook), two things stand out. First, in all the major economies, both business and consumer sentiment is weakening, sometimes sharply so. But, secondly, sentiment generally still remains above its long-term averages.
Looking first at the United States, perhaps the most spectacular change is in housing market confidence The NAHB housing market index reached a recent peak of 74 in December 2017. Since then, it has plunged to a 3½-year low of 56 in December last year, compared with an all-time average of 50. Significantly, the recent deterioration was faster than expected. The NFIB small business confidence index reached an all-time high of 108.8 in August 2018, but has since fallen to 104.8 in November. While this was the lowest since March, it remains above the 98.2 long-term average. Looking at other business confidence surveys, both the manufacturing and the non-manufacturing ISM indices have held up better. Both are well above the 50 ‘boom-bust line’ and both rose in November. But they are also both down somewhat from recent highs. By contrast, the University of Michigan Consumer Sentiment Index while broadly moving sideways through the year, saw a final December reading of 98.3, down from recent highs (101.4 in March), but again above its long-term average (87.2). However, the future expectations index has recently been trending down. In addition, the regional Federal Reserve Bank surveys are generally showing business activity rapidly dropping.
Moving to the Euro Area, the EU Commission’s Economic Sentiment Index (ESI) reached a 17-year high of 115.1 in December 2017, before steadily weakening every month in 2018. The latest reading, 109.5 (November 2018; December data is only published on 8th January), is still above the 100.8 long-time average. But, with the exception of construction sector confidence, all sectoral indices are weakening sharply, notably consumer and industrial confidence. Of the major EU members, French confidence is deteriorating the most; German is more stable but fraying slightly; while Italian confidence, perhaps surprisingly, is holding up well.
In China, the CFLP manufacturing PMI fell below the 50 ‘boom-bust line’ in December, the lowest number in close to three years. The non-manufacturing PMI is doing slightly better, but was still at a two-year low last month. Finally, in Japan, consumer confidence, which improved throughout most of 2017 and early 2018, has since trended down again, to an 18-month low in November. On the business side, the quarterly Tankan business survey from the Bank of Japan shows a similar pattern, i.e., improving through 2017 and early 2018, then weakening, with the outlook for early 2019 deteriorating further.
To conclude and summarise, both business and consumer confidence levels remain reasonably strong. But, at this point in time, what is worrying is not the level, so much as the downward change, Moreover, confidence currently seems to be at an inflection point. Good news — e.g., an end to the US-Chinese trade war, or a strong signal from the Fed that interest rates have stopped rising and/or QT is paused — might reverse the fall.1 By contrast, bad news — the inevitable tweets from President Trump, perhaps involving firing the Fed Chair, or further market falls — could trigger a sharper deterioration.
As noted above, monetary data already tell us that early 2019 will see a slowdown. If the money numbers are now reinforced by continued weakening business and consumer confidence, the result is likely to be a prolonged and sharper slowdown, just possibly involving at least one quarter of GDP falling in the US and/or the EA. And the equities bear market will continue, while bonds give little succour.
1 Of course, too strong a statement to this effect from the Fed — or an announcement from the ECB that QE will continue after all — could also have the opposite effect, namely markets worrying that things are worse than they seem.
And now, for something completely different:
Last November, I published two more books. One was An English King, the second book in my historical novel series. The second, called King Oscar’s Gamble, is my 2010 MA thesis in Military History. You can read more about them here. They are of course available on Amazon.