The spread of the delta variant and rising consumer prices have made consumer and business sentiment difficult to gauge in the third quarter. You can see it in retail sales data, which fell 1.1% in July versus an expected drop of 0.3%, before rising 0.7% in August versus an expected decline of 0.8%.
Sentiment has been difficult to gauge because different parts of the country and world are going through different stages of the pandemic and have different policies in place, all of which impacts business activity and consumer spending. Global supply chain issues also continue to be a problem.
But with the third quarter drawing to an end, it's important to try to understand how consumers and businesses have fared over the last three months, because it can help you understand earnings results for different sectors and companies -- which can be a big catalyst for stocks.
There's obviously all sorts of data you can use to gauge consumer sentiment. But one fairly easy thing I like to do is see what some of the largest banks in the U.S. and world are saying, as their performance is very closely linked to the economy and they have good insight based on what their consumer and business clients are up to. Recently, most of the large banks spoke at the Barclays Annual Global Financial Services Conference.
The consumer still seems to be trending positively, despite a spike in the delta variant across the world over the past three months. Marianne Lake, co-CEO of JPMorgan Chase's (JPM 0.17%) consumer and community banking division, said that after an acceleration of spending from the end of 2020 through the second quarter of this year, spending has softened a bit, particularly in sectors hit hard by COVID-19, like travel, airlines, and lodging. But Lake said that consumer spending at the bank is still up 18% or 19% compared to 2019.
While the softening may not sound great, I actually think it's very good to see spending levels remaining strong considering what has happened with the delta variant in Q3. This shows that despite the disruption, the economy is getting better at operating with the virus continuing to spread.
Stimulus checks have also begun to run down in the quarter, as have unemployment benefits. Earlier this month, millions of unemployed Americans stopped receiving an additional $300 per week. Lake said this impact could soon add a jolt to consumer spending, as consumer balance sheets begin to run down and more people begin to borrow again, but normalization could take some time, as an extraordinary amount of stimulus has been injected into the economy over the last year.
Lake added, "I never like to call a point of inflection, but it is our expectation that as stimulus fades, if the health situation remains under control, which we think it will, the economy remains in solid growth mode, which we think it will."
Lake's comments were supported by Citigroup's (C -1.45%) CFO, Mark Mason, who said credit card purchase sales were up "pretty meaningfully" across the cards business, but that pay-down rates also continue to stay elevated, showing that the consumer overall is still financially healthy, likely from savings and stimulus built up during 2020 and early 2021.
As it has for much of the past year, business sentiment has stayed more negative than consumer sentiment. Most banks reported through the first two quarters of this year that many businesses are still not taking out loans for capital expenditures or reinvestment, as they deal with supply chain issues and wait out uncertainty.
However, in the second quarter, some banks reported some slight loan growth. That trend continued for one of the nation's largest lenders in Bank of America (BAC -4.26%), which at the Barclays conference provided some insight on the bank's commercial loan growth in July and August.
I see the steady but continued growth in July and August as a good sign that the delta variant has not overly derailed the modest momentum coming back to the commercial business community. It may not be exploding, but it's growing. Commercial revolving lines of credit remain flat, according to Alastair Borthwick, president of global commercial banking at Bank of America. Revolving lines have stayed flat at most banks for a while, which has led to muted loan growth on the commercial front, so again this suggests that business sentiment is still not where many would like to see it. Borthwick said he thinks it is currently very difficult to predict when revolver utilization will pick up.
Insight from America's fifth-largest bank, U.S. Bancorp (USB -2.21%), seemed to echo Bank of America's. CFO Terry Dolan said line utilization levels at the bank were stable and that commercial and industrial (C&I) loan growth, which is for many small businesses, is still muted, although loan pipelines are strong and he does see optimism across the bank's markets.
"When we think about the different components of it on the C&I side the biggest challenge there is that we continue to experience elevated pay downs, which I think is happening in the industry, given the attractive interest rate environment and the opportunity for people to be able to access the capital market space," Dolan said. "There is also a fair amount of excess liquidity that exists in the market."
What this means for you
You can use this data on consumer and business sentiment to think about stocks and their third-quarter earnings results, most of which will be reported in October and early November. Companies that rely on consumer spending should overall be in decent shape to hit their projections, although you may want to bring a healthy dose of skepticism to the travel, lodging, and airline sectors, which Lake said she had seen a softening in. While it's harder to predict on the commercial side, businesses still seem to be spending and borrowing at a lower rate than consumers, so keep this in mind, particularly when it comes to companies trying to acquire new business customers.
It's important to look at the stocks you are evaluating and try to figure out as much as possible how their customers were impacted by the delta variant and other macroeconomic factors in any quarter. Learning what we can from the big banks is a good first step.