John Kemp

LONDON (Reuters – Rising real incomes and rapid price increases are leading households to put off purchasing durable goods, such as appliances for their homes. It is a sign that often coincides with a slower business cycle.

The most sensitive and cyclically sensitive segment of consumer spending is expensive durables like cars, furniture and refrigerators. They often signal the beginning of a recession.

In his presidential address to the American Economic Association in 2017, exploring the role of narratives in propagating the business cycle, economist Robert Shiller characterised a recession as “a time when many people have decided to spend less, to make do for now with that old furniture instead of buying new, or to postpone starting a new business, () to postpone hiring new help in an existing business.”

In the United States, there are already signs that consumer spending will decelerate in response to higher inflation, declining real incomes, and supply disruptions stemming from the pandemic and Russia’s invasion of Ukraine.

Every month, the University of Michigan’s Survey Research Centre conducts a telephone poll of at least 500 households selected to be broadly representative of the Lower 48 states.

Roughly 50 questions are asked covering households’ own financial prospects as well as their views on the state of the economy in the near term and over the longer term (https://tmsnrt.rs/3vN0r5N).

In the latest survey, conducted in March, 57% of respondents said it was a “bad time” to purchase a major durable item, compared with only 37% who said it was a “good time”.

In six months the proportion of buyers who say it’s a bad time has been highest since 1980. The ratio between bad and good times responses is also at its lowest level in over 40 years.

Some 42% of respondents said it was a bad time because of high prices, while 7% cited uncertainty about the future, 4% said they couldn’t afford it, and only 1% cited interest rates.

The latest survey also found that 72% believed it would not be a good idea to buy an auto in the next 12 month. This is compared to only 24% who felt it would be.

Both the percentage of respondents saying it was a bad time to buy and the negative balance were the worst in records going back to 1978 (“Survey of consumers”, University of Michigan, 2022).

Some 57% blamed high prices, compared with 5% who cited interest rates, 5% who cited future uncertainty and 4% who said they couldn’t afford to buy.

In recent decades, spikes in the bad-time-to-buy measures have corresponded with end-of-cycle recessions or at least mid-cycle slowdowns (“Consumer expectations: micro foundations and macro impact”, Curtin, 2019).

INEVITABLE ADJUSTMENT

A major reason why Americans are feeling increasingly anxious about the state of their economy and finances is because of rapidly rising prices.

The University of Michigan’s composite index of consumer sentiment has tumbled to its lowest level for more than a decade and is in only the 2nd percentile for all months since 1980.

The reason it’s a bad time for durables and cars is more often cited by consumers as affordability, future uncertainty, or interest rates.

All these barriers will become even more significant as real incomes fall and interest rates rise.

To some degree, higher prices and lower spending can be seen as a response to the capacity and supply chain challenges that have developed in freight transportation and manufacturing in the aftermath of the pandemic.

The high prices of durables will promote the shift in consumer spending away from durables towards services like travel, tourism, and entertainment. These industries are just beginning to reopen after being locked down and quarantined.

As inflation continues to rise, some households may delay major purchases in order to save money on fuel, food and other services.

While the anticipated slowdown in durables expenditure could help ease the price pressure on commodities, production capacity and freight systems, there could be recessionary consequences if it is too severe.

Forecasters are unable to tell the difference between an inflation-moderating hard landing or a recessionary hard land. Policymakers cannot navigate this area with accuracy.

The United States is likely to experience a slowdown in mid-cycle or an end-of-cycle recession within the next few months.

In Europe, the region’s proximity to the Russia/Ukraine conflict and higher energy prices mean the probability of a significant slowdown or recession is higher.

China’s government has already admitted the increasing frequency of coronavirus outbreaks and strict lockdowns has hit consumer spending, in a long statement on “unleashing consumption potential” published on April 25.

The top-level agency for economic planning, the National Development and Reform Commission (or NDRC), has pledged to stabilize consumption and in-person service and increase durable purchases.

Higher fuel and food prices will lead to lower expenditures on durables in countries with low incomes across Asia, Africa, Latin America and Asia.

The likelihood of consumers being under severe pressure in major economies is high. These factors have started to impact energy and commodity prices.

Similar columns

Reuters March 23, 2003: Economic War pushes the business cycle to its tipping point

– After Russia invades Ukraine, global recession risks increase (Reuters, March 4)

– Fed searches for elusive soft landing (Reuters, Feb. 2)

Reuters: The biggest inflation threat for the global economy (Oct. 14).

John Kemp is a Reuters Market Analyst. His views are his alone