Quick takes on capital markets

01 Apr 2022

Buying conditions: A shift in consumer sentiment

As ongoing supply chain issues from Asia and eastern Europe continue to impact supply and drive-up costs, firms producing discretionary or durable goods may soon find that consumers are becoming far less tolerant of price increases.

Buying conditions
Level, 100 = neutral sentiment, University of Michigan consumer sentiment survey, 1960 – present

Buying conditions chart
Source: University of Michigan Surveys of Consumers, Principal Global Investors. Data as of March 25, 2022.

Firms that produce durable or discretionary goods may soon feel a pinch in their profit margins. While ongoing COVID lockdowns in Asia and the geopolitical conflict in eastern Europe have contributed to global production woes, consumers may soon be less tolerant of price hikes that they have broadly accepted over the last 12 months.

For much of the recovery, businesses could opportunistically raise prices—consumers were flush with cash and willing to pay more. However, this trend may be ending. Intentions to purchase both vehicles and household durable goods are now at the lowest levels in history.

Expect headwinds for these producers to only worsen from here: the Federal Reserve's fight with inflation is ultimately a fight against pricing power. By raising borrowing costs, purchases become less affordable at the same price. At the same time, higher food and energy prices encroach on household budgets, forcing consumers to make cuts elsewhere. Historically, durable or discretionary sales have been the first to falter.

Not all firms are poised to handle this challenging macroeconomic environment. In general, consumer staple, large cap, quality, or defensive firms may be more resilient, but active management will remain paramount for selecting companies that can maintain pricing power.

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