Despite soaring equity markets and resilient household spending, Canadian consumer confidence continues to erode. A new report from BMO Capital Markets explores the growing disconnect, suggesting consumer anxieties may not be rooted in actual economic weakness. However, if sentiment doesn’t improve it can slow the economy—triggering the concerns they fear.
Canadian Households Feel Gloomy, But TSX Has Never Been Better
Canada’s largest stock market is the latest data point to ignore eroding consumer confidence. The TSX kicked off the week hitting a record high on Monday, and is up 5% year to date. It’s not often that investors are feeling good about the future of the economy, but households aren’t.
“Suffice it to say that this runs against the common narrative surrounding the economic outlook, which is nothing short of dire among consumers and businesses,” said Douglas Porter, chief economist at BMO. “This gap has been well-noted for months now, but has become even more extreme in recent weeks with the snappy rebound in the TSX since early April.”
The TSX follows a long list of positive macro indicators that are outperforming, including the output gap. The narrow output gap implies the economy is running near its full capacity, which is behind that soaring inflation. Even with households generating significant economic activity, consumer confidence has fallen to record lows on tariff and trade concerns.
Consumer Confidence Vs Spending: Historically Close, Now Diverging
Diverging macro data and consumer confidence has BMO pondering if these surveys are even a good predictor of the economy. They charted consumer confidence against household spending, and found historically it has been. In the chart below, it’s clear the two were extremely close for most of history. A larger gap forms post 2021, but the trends generally move in the same direction until the end of 2024.
Source: BMO Capital Markets; Statistics Canada.
“As the accompanying chart suggests, confidence figures at least used to be very good coincident indicators of real spending activity,” notes Porter. “The pandemic clearly unsettled things (including the need to clip the chart’s scales surrounding that period.”
Canadian Households & The Risk of A Self-Fulfilling Prophecy
He suggests the burst of inflation is where things start to rattle consumers. Though the rattling hasn’t impacted their spending much, with the bank estimating real spending will show 3% year over year growth in Q1 2025, after April retail sales were firm with an 0.5% advance.
“The bottom line is that while we can’t ignore the confidence numbers, they appear to be sending a much more negative signal than the reality on the ground. Blame social media?” Porter speculates.
Policymakers whipped households into a panic, and now they’re struggling to convince them reality is correct me. If consumers continue to embrace slowdown concerns, they won’t spend as freely. Ironically, this can trigger the economic recession and slowdown they’re worried about.
When there’s a conflict with the data and sentiment, they’re measuring the data wrong: Bezos.
We can see a lack of home sales, mass unemployment, and food bank lines like I’ve never seen before in Canada. The data (ex-employment) says they’re all fine though?
My guess is Stats Can is pulling another Stats Can’t, and its influencing the whole data reporting for the economy.
Interesting point, and lines up with Punwasi’s twitter thread on the material revision warning Statistics Canada put out. It was trade data but it would impact all of these issues.
A couple things to add:
– consumer data isn’t as good as economists seem to think. It’s better than they expected, but far from good, especially when adjusted for population growth
– a recession doesn’t occur to everyone all at once. I don’t know where exactly is hurting but that doesn’t mean just because it’s not my area it’s not happening.
– no one is really sure why the TSX is moving higher; without any insight into the gov’s actual spending, this can easily be private deals being funded that we’re not hearing about
It really is hard to tell if things are crappy or back to normal after a zero-rate frenzy that made everything seem ridiculous. I might be lucky but I personally haven’t seen many people impacted by the recent downturn.
That is called a fn ponzi dumbasses.
Who are these rich households that have extra room to spend and continue to ‘carry the economy’? I would like to meet them. Me and my homies are broke! What percentage of households accounts for the growth in spending, or do they expect to account for the increase in spending that would maintain GDP growth? I think that’s a pertinent question. A lot of households I know are going deeper into private debt, how much of that ‘household spending’ is based on credit? I also wonder how much of the household spending is just a result of “sticky inflation” because hey, we are stretched already and can’t afford to skim off much more, so not hugely surprising spending isn’t going down massively IMO.
There is some bizarre dissonance between “households are just grumpy and oh no they may choose to spend less” versus “The math in my monthly household budget does not leave room for extra spending”. Spending that is maintained is largely on credit and for pretty core goods, for the majority of households, is my suspicion; while nominal spending generally is also buoyed by the increasing appetite of the (shrinking in class size) upper middle class / wealthy and above for luxury goods.
Agree with comments that there is a mismatch btwn data and reality and that it should lead towards more skepticism of the data inputs.