Drooping consumer sentiment is pointing the way to a substantial economic slowdown, if history is any guide.
In particular, the gap between current sentiment and future expectations has blown out wider, according to the Conference Board's Consumer Confidence Index released Tuesday.
While confidence in the broader confidence index remains strong, falling just slightly month over month, the Expectations Index tumbled from 97.7 to 87.3 from December. Since October, the expectations reading has plunged 24 percent. Conversely, the Present Situation Index is at 169.6, a nudge lower from December's reading.
Such wide gaps have portended sharp declines in economic activity, as pointed out by several market observers, including DoubleLine Capital's Jeffrey Gundlach, the so-called Bond King.
"The most recessionary signal at present is consumer future expectations relative to current conditions. It's one of the worst readings ever," he said in a tweet.
The difference between the two readings has only been wider three times in the survey's history going back to 1967, according to Bespoke Investment Group. Those came in January through March of 2001, the final month being the beginning of a recession.
Moreover, when the gap between the Present Situation and Expectations indexes has exceeded 50 — it is currently at 82.3 — "recessions weren't far behind," wrote Bespoke's Paul Hickey.
The partial government shutdown, which ended this week, was the longest in history and likely dented sentiment.
"Shock events such as government shutdowns (i.e. 2013) tend to have sharp, but temporary, impacts on consumer confidence," Lynn Franco, senior director of economic indicators at The Conference Board, said in a statement. "Thus, it appears that this month's decline is more the result of a temporary shock than a precursor to a significant slowdown in the coming months."
But Hickey said investors would be wise to watch what appears to be a fragile economy closely. He said such disparities in present and future sentiment are the last indicators of growth that is in its latter stages.
"The stock market decline in December followed by the government shutdown undoubtedly had a negative impact on consumer sentiment in January, so the big gap in sentiment towards the present and future doesn't guarantee that the US economy is on the cusp of a recession, but it does serve as a reminder that the economy is a lot slower now than it was a year ago," he said in a note. "Therefore, the cushion to absorb any further weakness has worn thinner."