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Turbulence has arrived in equity markets. While the headlines have focused on ‘Tariff Talks,’ it was the worry about a loss of momentum in the US economy that prompted the current volatility. The unease was caused in part by a drop in US consumer confidence as measured by the University of Michigan. The chart below shows that consumer confidence (green line) did drop in January, down almost four points.
Tracking the year-on-year growth in Retail Sales (blue line) highlights that there has not been a great linkage between the two series. Since the middle of 2023, consumer confidence has been trending upwards, but the growth in Retail Sales has been declining slightly. Since the middle of 2024, consumer confidence has jumped ten points, but Retail Sales growth has hardly changed.
This tells us that there is a dichotomy between what consumers say they are going to do and what they actually do. Sentiment surveys may only tell part of the story. Conditions in the labour market and wealth effects are probably better indications of what consumption will be like, and these remain robust.
