The Weak Consumer: The black swan for the economy

A report by senior economist Andrew Duguay in CNBC today says the black swan in the economy will be the "weak consumer". He argues that over the last two quarters, consumers have propped up the economy, so today's retail figures will be of huge significance in revealing how weak the consumer will be in the second quarter, since it is the first crucial step on the road to either recession or economic recovery. If the figures are below expectations, this will require a massive rebound over the next couple of months in order to move in the direction of economic acceleration in the third quarter; if on the other hand the numbers are good, he predicts this will be the first good sign consumers, and the economy, are making a comeback. However, he adds that given the recent jobs report showing stagnant wage growth, the retail numbers may not be encouraging, citing that wages, inflation and consumer sentiment are the key drivers that impact consumers and the economy.

The critical factor that could tip things from cautious to very problematic is if price inflation starts to kick up. This hasn't happened yet, so it is a hypothetical, but given how much prices have fallen and that most commodities have developed some floor over the past six months, it wouldn't be unreasonable for prices to regain some traction in 2016. This is especially true with monetary policy all over the world being very loose and interest rates low.

For example, oil prices finished their major decent last summer before settling at between $30-40 per barrel. Oil is the basis for other commodities; so while we saw food prices plummet in tandem with oil, we can expect food prices to rise or adjust with oil. Even if oil rises to $50 a barrel as high cost production is cut around the world, it is a 25-percent to 65-percent increase over this winter's prices. That could certainly move the needle on the consumer-price index and hurt the consumer.

While many economists remain optimistic about the economy given the history of a weak first quarter over the past five years, we have clear indicators that our current economic scenario is not vastly different from the early stages in 2001 and 2008. Consumer sentiment will be key in determining whether we in the midst of a weak economy, or in fact on the road to recession.