Is the mighty US consumer faltering?

By Julia Horowitz, CNN Business

America’s economy is driven by shoppers who shell out big money for items like iPhones, sofas and cars and experiences such as dining out. So when consumers start to feel less confident, economists and investors worry.

What’s happening: Consumer sentiment in the United States has dropped to its worst level in a decade, according to a survey from the University of Michigan released last Friday, as shoppers fret about how high inflation is hitting their bank accounts.

“The impact of higher inflation on personal finances was spontaneously cited by one-third of all consumers,” said Richard Curtin, the chief economist behind the survey.

He’s not the only one to acknowledge this dynamic. St. Louis Federal Reserve President James Bullard said Monday that the Federal Reserve needs to act quickly and decisively to rein in inflation and bolster consumers. The central bank’s “credibility is on the line,” he added.

“This inflation we’re seeing is very bad for low and moderate-income households,” Bullard told CNBC. “Real wages are declining. People are unhappy. Consumer confidence is declining. This is not a good situation.”

Higher-income households are also feeling anxious, the University of Michigan survey showed. Its entire decline this month was attributable to a large drop in sentiment among households with incomes of $100,000 or more.

Why it matters: Curtin said the index “now signals the onset of a sustained downturn in consumer spending.” Since this spending fuels about 70% of US economic activity, that’s a concern.

US economic growth is expected to stay strong this year, slowing only modestly from 2021 rates. And despite heightened attention on one possible recession signal in the market, plenty of positive factors remain.

Corporate earnings from the end of last year look solid. A resilient job market continues to impress. And while Americans are saving less money than they were earlier in the pandemic, when businesses were closed and stimulus checks were coming in, banks have said their customers still have plenty of cash on hand.

But Michael Wilson, chief US equity strategist at Morgan Stanley, told clients this week that faltering consumer spending could pose a “market risk.” A potential slowdown is one reason he thinks the correction in stocks “remains incomplete.”

“We think ignoring the extraordinarily weak consumer confidence number would be a big mistake,” Wilson wrote.

He sees the University of Michigan data as more significant than the much-publicized inflation reading, which showed US prices rising in January at the fastest clip in four decades.

“We think equity markets will now begin to focus on growth, or the lack thereof,” Wilson said.

The combination of weaker growth and elevated inflation could ultimately make it harder for the Fed to get inflation under control. That’s because interest rate hikes, which fight inflation, can cool the economy.

“One of the reasons we are skeptical that the Fed and other central banks will be able to deliver on the policy tightening now expected is the fact that growth is already slowing, an unusual circumstance at the beginning of any monetary policy tightening cycle, and especially one that is so ambitious,” Wilson said.

The rental car market is still super hot

Rental cars in the United States have gotten extremely pricey as people look for ways to travel around the country during the pandemic.

That’s boosting companies that lease vehicles like Avis, which reported results after markets closed on Monday.

The latest: The company — which will hold its earnings call with analysts Tuesday morning — said revenue for the last three months of 2021 rose 90% compared to the previous year to $2.6 billion.

“The significant increase in revenues suggests a steady return to historic travel levels,” Avis said in a press release.

The company reported a full-year profit of $1.3 billion after posting a loss in 2020, and said it had been its best year ever.

Avis has needed to maintain a big fleet over the past year to meet the surge in demand. But investors will be eager to hear if CEO Joe Ferraro has new guidance on Avis’ plans to sell used cars directly to consumers — another source of potential profit.

Investor enthusiasm for the stock appears to have dissipated, though. The last time the company reported earnings, shares of Avis more than doubled. They’re up just 1% in premarket trading on Tuesday.

Avis’ stock has shed about 6% year-to-date after skyrocketing more than 450% in 2021.

Competitor Hertz has generated buzz as it’s emerged from bankruptcy and announced partnerships with companies like Tesla and Uber. But its stock has fared worse, dropping 18% so far this year. Hertz reports earnings next week.

Wheat and corn prices are hooked on news from Ukraine

Concerns about a Russian invasion of Ukraine are roiling the market for agricultural products like wheat at a time when global food prices are already near 10-year highs.

Russia is the world’s top exporter of wheat. Ukraine is also a significant exporter of both wheat and corn. That’s sending prices for grains on a bumpy ride as investors assess the potential for conflict.

“There’s certainly volatility based on what is going on,” Peter Meyer, head of grain analytics at S&P Global Platts, told me.

Interference in shipments of wheat or corn from Russia and Ukraine could exacerbate food inflation, most notably in parts of the world that depend on them for supplies.

Global food prices rose as much as 28% in 2021, according to the Food and Agriculture Organization of the United Nations, and are expected to continue to climb this year due to persistent supply chain issues.

“Ukraine is a major exporter of wheat and corn and any disruption to its exports would lead to a spike in global prices,” said Ophelia Coutts, a Russia analyst at the global risk consultancy Verisk Maplecroft. “A combination of high food and energy prices will accentuate a cost-of-living crisis and increase the potential for civil unrest in many places, particularly in Africa and the Middle East.”

Up next

Marriott and Restaurant Brands report results before US markets open. Airbnb, Roblox, ViacomCBS and Wynn Resorts follow after the close.

Also today: The Producer Price Index for January, a key measure of inflation, posts at 8:30 a.m. ET.

Coming tomorrow: Earnings from Hilton, Kraft Heinz and DoorDash.

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