All the Feels
We hear a lot about the measurable economic facts–manufacturing activity, jobless claims, retail sales, the prices of goods and services–that tell us what people are doing. But what about how they’re feeling? Turns out, we can measure that, too.
For May, the Conference Board Consumer Confidence Index came in at 117.2. Although this missed expectations of 118.8, a reading above 100 is generally “good” while readings below 100 are generally “bad”. For comparison, this level is below the July 2019 pre-pandemic high of 135.8, and well above the April 2020 low of 85.7.
But what’s the predictive power? Consumer confidence measures households’ outlooks on business conditions, employment, and income. One would think the higher the better, right? Not so fast. If things get too hot they can be problematic.
The problems can be: excessive risk-taking in financial markets, inflation, tightening policy response from the Fed, consumers overspending (not saving enough or taking on too much debt)–we’ve seen different versions of this story play out and they rarely end well.
So we want it to be warm, not hot. And we need to look at other measures of risk-taking to see if consumers or investors are taking it too far. Evaluating all of them is beyond the scope of this post, but a couple encouraging signs:
The put/call ratio measures the amount of options outstanding. Importantly, how much protection (puts) investors are buying at a given time, or how much optimism (calls) they have about market direction. When this measure is at extremes, it can mean overwhelming bearish or bullish sentiment. When not at extremes, the market feels more balanced. Currently, the 10-day average put/call ratio is 0.83, and is in what I would consider a “comfortable” range. Investors are still being watchful and don’t appear to be complacently ignoring risks.
We can also look at household debt levels, which rose in Q1 to $14.64 trillion. This is higher than the pre-pandemic level of $14.15 trillion in Q4 2019, but much of the rise was driven by an increase in mortgage and auto loans, and was actually coupled with a reduction in credit card debt. Moreover, the average credit score of borrowers taking on these new loans edged higher over the period, which bodes well for debt quality and repayment.
Indicators like these deserve a watchful eye and a sensitive ear. This is not an exact science, and there are many variables at play. For now, I think we’re in a good spot as consumers and as an economy. Warming up, but not too hot. Let’s hope we can avoid a fever.
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