Consumer Sentiment and Sentimental Farewell

Episode Summary

Executive Summary: The episode centers on a broad economic slowdown, with particular focus on weakening housing activity, still-resilient labor markets, and the tension between high inflation and recession risk. The guests debate whether current indicators point to an imminent recession or a slower-but-positive landing, while John Lear’s survey work suggests consumer confidence and inflation expectations are deteriorating in ways that could eventually hit spending.

Main Topics: Housing market weakening under high mortgage rates (Priority: 5/5): The panel reviews falling sales, weaker starts, flat permits, and refinance activity collapsing as mortgage rates stay elevated. They discuss the supply-side irony that higher rates suppress new construction even as more housing is needed to cool rent inflation. Recession odds and the state of the cycle (Priority: 5/5): The hosts and guest compare recession probabilities, with Ryan and Chris more bearish than Mark. They debate whether the economy can avoid recession if consumers and labor markets hold up, while noting growth has slowed sharply. Consumer confidence, spending, and inflation expectations (Priority: 5/5): John Lear explains that Morning Consult’s daily surveys show confidence falling while spending has held up better, but more recent declines in confidence and rising inflation expectations—especially among older adults—could eventually weaken demand. Labor market resilience and quits data (Priority: 4/5): Despite slowing growth, unemployment claims remain low and employment still appears solid. The group discusses quits, job-search behavior, and labor hoarding as signals of labor-market tightness and possible future wage pressure. Credit spreads, yield curve, and recession indicators (Priority: 4/5): The hosts assess traditional recession signals such as the yield curve, high-yield spreads, and unemployment. Mark argues those indicators are not yet flashing recession, while John cautions that today’s inflation environment may distort historical signals. Remote work, productivity, and small business adaptation (Priority: 3/5): Lear shares survey evidence that remote workers report lower burnout and higher satisfaction, with many small businesses now operating hybrid models. The group notes economists may not yet fully understand the spillover effects on spending, commuting, and productivity. Election and politics as an economic headwind (Priority: 2/5): Lear briefly notes that worsening views of the economy in battleground states could hurt incumbents in the upcoming midterm elections, but declines to make a firm political forecast.

Key Arguments: Housing is weakening across sales, construction, and refinancing because high mortgage rates are suppressing demand and supply simultaneously. The economy is slowing, but a recession is not inevitable if consumer spending and labor-market resilience continue. Consumer confidence matters more than its level; sharp declines typically precede recessions, and current confidence trends are weakening again. Morning Consult’s daily data show spending has held up better than confidence, but the gap may close as savings shrink and wage gains cool. Inflation expectations remain elevated around 7%, and their distribution has shifted upward, suggesting inflation psychology is still sticky. Traditional recession indicators may be less reliable in a high-inflation environment than in prior cycles. Remote work appears durable, with benefits to burnout and satisfaction that are likely to persist and reshape business behavior.

Data Points: U.S. daily consumer surveys: 6,000 per day - Morning Consult’s U.S. sample used to track consumer sentiment at high frequency Global daily surveys: roughly 20,000 per day across 44 countries - Morning Consult’s broader survey operation Team size at Morning Consult economics group: 6 full-time, soon to be 7 - John Lear’s economics team staffing update MBA mortgage applications: down about 4.5% - Weekly housing-related data showing weaker refinancing and purchase activity Existing home sales: 4.71 million - September housing sales data cited by Chris Building permits: about 1.56 million - September permits for single- and multifamily units, roughly flat vs. August House price declines: more than half of metro areas - Mark notes broad-based house price weakness nationwide San Francisco house prices: around 8% decline - Example of sharp metro-level price correction Potential home sellers intent on selling: 15% in February to 10% now - Morning Consult survey showing sellers pulling back from the market Consumer confidence decline: roughly 15% to 20% this year - John Lear says confidence has fallen materially even as spending held up Probability of recession estimates: Ryan 75%, Chris 70%, Mark 55%, John about 60%-65% in first half of 2023 - Hosts and guest compare recession odds Q3 GDP tracking: around 2% - Mark says growth in Q3 is still positive but softer underneath Q3 GDP excluding net exports: 0.4% annualized - Illustrates underlying weakness after stripping out trade effects Initial unemployment claims: very low - Used as evidence that layoffs remain limited and labor market stays strong Consumer expectation of income loss among employed adults: about 9% - Down from 12%-14% earlier in the year in Morning Consult data 12-month inflation expectations: 7.01% - Morning Consult/Cleveland Fed indirect inflation expectations measure Peak 12-month inflation expectations: just shy of 8% - Peak reached in the third week of June, according to Lear Share expecting inflation at or above 10%: higher than before; distribution shifted upward - Lear notes more respondents are in the high-inflation tail Work-from-home survey result: lower burnout, higher job satisfaction, lower work stress - Survey findings after controlling for income, age, education, and occupation/industry Small businesses operating hybrid: 55% to 60% - Q3 small-business survey result on hybrid work adoption Refinance index: down 86% year over year - MBA refinance activity is at the lowest level since the late 1990s/early 2000s Average mortgage rate on outstanding loans: 3.5% - Marks the average rate on existing mortgage stock, showing why many homeowners are locked in Current 30-year mortgage rate: well over 7% - Explains why refinances and moves are discouraged High-yield bond spread: 4.97% - Mark’s statistic: roughly equal to the long-run average spread over Treasuries Beige Book recession references: 13 - Mark’s statistic about recession mentions in the latest Fed Beige Book Consumer inflation expectations in the UK flash survey: dramatic increase among politically attentive respondents - Lear’s U.K. survey finding on political/economic uncertainty and inflation expectations State quits-rate example: Oklahoma had the largest month-over-month increase - John’s highly specific quiz statistic from BLS state quits data BLS quits data timing: August, seasonally adjusted - Clarifies the state-level quits-rate reference

Pivotal Quotes: "Monetary policy can't solve everything, right? And we actually do need more fiscal support or fiscal adjustments here" — Chris Dorides: Discussing the housing-supply problem and the limits of the Fed’s tools "It feels like to me. Yeah, still in the woods. Deep in the woods." — John Lear: Summarizing his view that inflation expectations remain elevated and not yet anchored "The game has changed meaningfully." — John Lear: Referring to the persistence of remote work and its long-term effects on labor and business behavior

Implications: Listeners should expect slower growth, sticky inflation psychology, and continued housing strain. The data suggest recession risk is real but not yet definitive, with consumers and labor markets still the swing factors.