By Chris Matthews, MarketWatch
If the U.S. economy is headed for a significant slowdown, nobody told the American consumer.
Even as economic growth abates and business investment and confidence has faltered in the face of an ongoing U.S.-China trade dispute, the U.S. consumer has continued to spend money and reflect confidence in sentiment surveys.
The latest evidence is the University of Michigan’s consumer sentiment survey released Friday, which rose to a three-month high of 96, beating consensus expectations and remaining near record levels.
The reading is bullish for U.S. equities as it predicts the U.S. consumer will continue to spend at high rate headed into the holiday season, but it also stands in stark contrast to other measures of the economy, including recent surveys by the Institute for Supply Management of the manufacturing and services sectors and measures of business executive confidence, which fell to the lowest level since the first quarter of 2009 in October.
“I’m not sure if we’ve seen this disparity between positive consumer sentiment and negative business confidence at this level,” Michael Arone chief market strategist at State Street Global Advisors, told MarketWatch. “From my perspective, something has to give. Either businesses have to be more confident, or you’re likely to see more rollover on the consumer data.”
One might think that business executives have a better handle of the trajectory of the U.S. economy than the consumer, but historically that’s not always the case. As Sundial Capital Research pointed out on Twitter, previous instances of high consumer confidence and low executive confidence have actually turned out well for stocks.
JJ Kinahan, chief market strategist at TD Ameritrade said that in the near term, it’s unlikely that American shoppers will slow their spending. “People are employed and when they are employed they spend money,” he said. “Heading into the holiday season, I see no reason why the consumer would slow barring some disaster.”
There are, however, a few signs in the data that may suggest that weakness in the U.S. manufacturing sector is affecting the larger services sector and the overall labor market, Liz Ann Sonders chief investment strategist at Charles Schwab told MarketWatch.
She said that while some analysts are eager to write off manufacturing weakness as inconsequential due to that sector’s shrinking role in the American economy, “there’s a reason why indices of leading economic indicators rely on manufacturing. It’s because there’s a multiplier effect from the sector that filters through to others.”
That manufacturing weakness has also coincided with falling business investment is also a concern, Sonders argued. She said that during 60% of quarters when economic growth has been negative since 1945, consumer spending stayed positive while business investment shrank. “Manufacturing weakness often tips over into the consumer side,” she said.
There are signs that this might already be under way, she warned, pointing to a Wednesday report which showed that job openings fell in August for the third month in a row, to a one-and-a-half-year low and to data showing that the average hours worked per week has been trending lower in recent months.
Though applications for unemployment benefits — a key leading indicator of the labor market and the broader economy — have yet to show any signs of weakness, Sonders said investors should monitor these data closely, given that businesses appear eager to cut costs and postpone new investment decisions.
Investors will get a fresh reading of U.S. consumer strength on Wednesday, when the Commerce Department will issue its estimate of retail sales growth for the month of September. That same day will see updates on business inventories and National Association of Home Builders’ index.
On Thursday, the Labor Department will issue its weekly estimate of new claims for jobless benefits, and the Commerce Department will issue readings of housing starts, building permits, and industrial production for the month of September. On Friday, the Conference Board will update its index of leading economic indicators.
Tuesday will mark the unofficial start to third-quarter earnings season, with several major financial services companies reporting their results, including Dow components Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS +4.83% and JPMorgan Chase & Co . /zigman2/quotes/205971034/composite JPM -0.09% as well as Citigroup Inc . /zigman2/quotes/207741460/composite C +0.81% .
On Wednesday, aluminum manufacturer Alcoa Corp . /zigman2/quotes/200686102/composite AA +0.52% will deliver results, along with Bank of America Corp . /zigman2/quotes/200894270/composite BAC +0.34% , International Business Machines Corp . /zigman2/quotes/203856914/composite IBM -0.62% and Netflix Inc . /zigman2/quotes/202353025/composite NFLX +0.52%
Thursday will see Altassian Corp. Plc. /zigman2/quotes/207177221/composite TEAM -0.62% reporting as well as Morgan Stanley /zigman2/quotes/209104354/composite MS +0.41% and Philip Morris International Inc . /zigman2/quotes/201611010/composite PM +1.13%