Disparity between consumer and business confidence

The week’s heightened rhetoric surrounding trade and politics is a reminder that the fears of market participants can quickly overwhelm fundamentals in the short run. That said, wavering confidence can be useful in reframing how we view those fundamentals -- a dynamic that may apply to the current disparity between consumer and business confidence in the world’s major economies, both developed and otherwise.

As in the U.S., consumer confidence in the rest of the developed world (and much of the developing world as well) has surged over the past year or two, reflected in robust retail sales figures. For example, overall U.S. retail spending for the second quarter of 2019 rose at a 7.5% annualized rate – suggesting that the U.S. consumer is spending confidently.

But confidence among businesses has been trending in the opposite direction, something that has happened only rarely over the past three decades according to Jack McIntire, portfolio manager at Brandywine Global (a Legg Mason affiliate).

A Short Term Mismatch of Confidence

Chart courtesy of Brandywine Global. Sources: OECD, Haver Analytics, as of June 30, 2019

Of course, this must now be seen through the lens of investors’ changing perceptions of the impact of trade tensions. But causes for general optimism abound as well. Over and above retail sales, employment has been strong and wages show signs of steady growth. Interestingly, optimism among U.S. small businesses also remains relatively high. But that suggests business confidence faces bigger challenges within larger multinationals and trade-focused corporations.