Animal Spirits

At i360 the data not spirits drive our business.

ANIMAL SPIRITS

The term “Animal Spirits” was coined by John Maynard Keynes in his 1936 book, “The General Theory of Employment, Interest, and Money” to explain economic fluctuations. The idea behind Animal Spirits was that consumer sentiment and behavior play a key role in economic cycles, and behavior was difficult to measure and model for an economist. Keynes, who was at one point, a director at the Bank of England, wouldn’t have the ability to phone his population to see how they were feeling, for up until 1948, there was only 1 phone per 8 people in the US. He relied upon hand compiled statistics that were already stale by the time he got the data.

At i360 the data not spirits drive our business as we measure consumer sentiment daily through our Consumer Pulse Survey. Consumer Pulse asks 1,000 respondents each day on our panel of 2.5 million US adults over 150 questions on key topics such as economy, lifestyle, real-estate, automotives, shopping, employment, political opinions and more.

Unlike Keynes, i360 can measure consumer sentiment robustly and in real time. Today’s consumers see all sorts of market prices change daily. From changes in housing prices, to the level of the S&P 500, gasoline prices, mortgage rates, beef prices, and more, these fluctuations affect the savings and spending of consumers. These price changes can lead to sharp changes in consumer sentiment. Consumers react much more violently in their mood when the rate of change of a price is high versus when rate of change is low. The beginning of this year, with the Russian invasion of Ukraine and the reopening from Covid, US consumers responded negatively to rapidly rising prices for gas, rent, food, and other staples. Then, in response to this high inflation and the tight job market, the Federal Reserve pulled away the punch bowl, raising interest rates and ending QE, causing asset prices such as equities and bonds to fall in unison, and taking some of the sizzle out of the financial markets. So, while consumer’s costs for necessities were going up, their wealth contracted.

In June, prices for commodities suddenly cooled. In addition, the market got a little more comfortable with the fact that the Fed was going to use their tools to squash inflation. To highlight this, we show the Bloomberg CRB Commodity index and the 5 Year Break Even inflation rate in the US priced into the TIPS market.

Given these stabilizing external conditions, we witnessed a slowing in the negative sentiment changes amongst US consumers. That is not to say their sentiment is improving, in fact it’s still in the dumps. However, with improving price conditions for commodities and interest rates stabilizing, sentiment is not getting worse. Below, we highlight a few of the measures we see in our survey data where we may have found a floor in sentiment.

Looking Ahead, which would you say is more likely?

The percent of people expecting unemployment and depression over the next 5 years stabilized at a high 55%.

Over the next year, do you expect to spend more or less than you currently do on groceries?

Our questions concerning future prices of household goods and groceries see some stabilization.

In a year from now, do you think you and your family will be better off financially, worse off financially, or about the same as you are now?

The rate of change of people thinking they will be worse off improved in June.

As evidenced by these responses, we witnessed a severe deterioration early this year in consumer sentiment, but recently, that deterioration has stopped getting worse, coinciding with the cooling of commodity prices, and slowing inflation expectations.

Despite their pessimism about the economy and grocery prices, consumers still feel good about the housing and job markets. If the job and housing markets hold up, we expect consumers to continue to spend.

How would you rate employment conditions in the United States today?

Consumers think jobs are still plentiful.

Asked of homeowners, what do you expect to happen to the price of your home in the next 12 months?

Ninety percent of homeowners expect their home value to go up or stay the same in the next 12 months, so generally, on the largest factor in their overall wealth, housing, consumers are still quite bullish.

This summer, consumers are catching up on delayed vacations, travel to see family and friends, going to camps, and doing all those things they missed out on in the summers of 2020 and 2021. That spending is already planned. The real test will be when they start planning back to school shopping and holiday travel this fall. As the economy shift back to more services spending from goods spending, we could see a trifecta of positive signals for the market. Lower commodity prices from shift in demand from goods to services could help inflation come down, inflation coming down could help consumer sentiment improve from the dumps it’s in now, and the Fed could become a bit less hawkish due to improving inflation expectations. That is one bullish scenario we could paint for the second half of 2022.

Real risks remain, however. These include food and energy shortages worldwide due to Putin’s war in the Ukraine. This risk is well known, but perhaps not completely measurable. In addition, European gas imports to replace Russian gas could drive US electricity and heating costs higher in the fall right as colder months begin to hit. Finally, cooling in the housing market could worry consumers. Mortgage rates are high and new home supply is finally hitting the market. Consumers still generally expect the value of their homes to rise. If that were to change, we could see buyers step aside while prices fall, construction activity drops, and that would have a real effect on the jobs market and the wealth of consumers. For now, though, we do see some potential positive catalysts to consumer sentiment.