United States consumer confidence as a leading indicator of recessions

1 min. reading
Investment / 13 December, 2019

Diego Balsa Portfolio Manager

In the current environment, should I sell or keep my investments?

In the current environment, should I sell or keep my investments?

It is not surprising that this climate generates doubts or reflections, and this question seems valid: Should I keep my investments or should I sell and leave? In reality, there is no simple answer since there are nuances and opportunity costs that imply different responses depending on the investment profile.

In the last 50 years, the United States economy has suffered a total of seven recessions. Each of them was preceded by a drop in consumer confidence in the world’s largest economy, specifically of the indicator’s one-year moving average.

The indicator has not yet begun to decline in the present scenario, suggesting there is no imminent risk of recession in the United States.

It is essential to point out; however, that consumer confidence stands at very high levels, which in the past has been followed by very rapid trend shifts towards lower confidence environments. These have historically led to weaker consumption, in turn penalising growth and impairing the labour market.

It does not appear that there is a risk of an imminent recession, as past data shows that on average the confidence indicator begins to decline around six months before each recession (there has been no drop as per the end of October 2019).

This indicator should be watched closely, as any initial deterioration could heighten economic warning signs and very quickly undermine investor sentiment, and therefore crucial asset prices.

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