With COVID-19 as the leading issue affecting the markets, we want to keep a close eye on consumer sentiment.
This time around we are focusing on the world’s largest economy. But the reasons for caring about consumers apply to pretty much most of the world now that the WHO has declared COVID-19 a pandemic.
The initial concern, which drove the first drop in global capital markets, was the potential impact on supply chains for businesses. The closure of production facilities in the world’s manufacturing area – China – meant that businesses might have increased difficulty in sourcing materials.
For retailers, it meant potentially running out of products. And, for manufacturers, it meant potential production stoppages. However, shortages did not materialize, and over the last couple of weeks, most major companies in the US and Europe have issued updates on their supplies and inventory.
Business Situation vs Consumer Situation
Most businesses issued profit warnings due to foreseen writedowns they’d make during Q1 from COVID-19-related effects. But all clarified that their supply issues were in hand and they had sufficient inventory.
While it might cause some additional stress on some companies’ financials, none said they were experiencing serious difficulties.
If a company has to delay production slightly due to supply issues, it generally isn’t a major concern. After all, you still make the sale, you just make it a little later!
But if consumer sentiment deteriorates, this implies a bigger problem. This is because it means people are less willing to buy. Supply issues can be addressed with alternate sourcing or other internal measures. However, a drop in buying will have a lasting, negative impact on the business sector and the economy as a whole.
Panic into a Recession
With COVID-19 spreading through the US, many worry America will implement economic measures to fight the disease that other countries have already done. That means restricting shopping and entertainment.
This is likely to massively impact consumer sentiment, especially if it leads to panic shopping as it has in Australia, Germany, Italy among others.
People buy what they believe are emergency supplies with what little money they have, leaving aside major purchases. Once they’ve “stocked up” they don’t have any need to buy more. And with consumption failing, businesses have to reduce production.
This scenario is already being considered in the financial sector. We’re seeing mortgage rates going up despite the Fed slashing rates and bond yields falling. This is because lenders are factoring an increased risk of defaults during an upcoming economically stressful period.
What We Are Looking For
Most of the upcoming Michigan Consumer Sentiment survey was carried out ahead of the sudden drop in the stock market. Therefore, we might not see that fully reflected yet.
Current expectations are for it to remain just slightly in expansion territory at 101.2 compared to 101.0 prior. That will probably be the last increase in the upward trend since September of last year.
Projections indicate that Michigan Consumer Expectations may decrease to 89.0 from 92.1. This reflects a negative outlook for the US economy as COVID-19 was already blanketing the news at this point.
The market is likely expecting this figure to underperform, given the recent events.