Reuters

Bank of America Merrill Lynch's US consumer-confidence indicator this month fell below 50, the lowest reading on record.

It shows that consumers are rattled by the latest trade-war escalation, BAML economists said.

US consumers are increasingly important to the economic expansion, and there are already signs that they're spending less.

Read more on Markets Insider.

Consumers are growing increasingly uneasy as the trade war rages on, according to Bank of America Merrill Lynch.

The firm's US consumer-confidence indicator this month dipped by 3.8 points, to 50.1, and even fell briefly below 50, marking the lowest reading on record.

"The consumer appears to be rattled by the latest escalation in the US-China trade war," Bank of America economists wrote in a note on Wednesday. "The drop in confidence appears to be already having an impact on consumer demand."

The indicator's decline coincided with the latest round of tariffs on a tranche of Chinese imports that contains more consumer goods than other groups have.

Bank of America Merrill Lynch

As the trade war continues, US consumer sentiment is becoming an increasingly important indicator of how the economy is doing and whether the expansion is likely to continue. At this late point in the cycle, a strong consumer and solid labor-market conditions are crucial variables.

The US consumer is "the segment of the economy that's still growing at a decent clip," Joseph Song, a US economist at Bank of America, told Markets Insider. "If it starts to stall out, that's going to lead the overall economy to stall out."

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But if consumers stop spending, it could lead the economy to decline. In August, the University of Michigan's consumer-sentiment index showed its largest monthly decline since December 2012. There are already a few signs that lower consumer confidence is leading to less spending, the Bank of America economists wrote.

The road ahead

If there isn't progress on the trade-war front, consumer confidence might not improve. Bank of America's indicator measures both current conditions and expectations; this month, the current-conditions indicator by fell 3.6 points, to 51.6, and the expectations indicator plummeted by 3.9 points, to a reading of 48.5, below the breakeven point of 50.

US businesses are also showing signs of worry. In a September UBS survey, more US business owners said they'd stop hiring and investing in businesses if the trade war continues. Optimism among small businesses hit a five-month low in August, and US companies slashed more than 10,000 jobs because of the trade war in the same month.

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Still, while the consumer-confidence indicator is down, Bank of America says the sentiment has not spilled over into respondents' attitudes on the labor market. One data point economists noted was the increased share of multiple-job holders, suggesting that while the labor market is tight, people continue to hold multiple jobs to make ends meet.

Economists at Bank of America have been tracking US consumer confidence since 2018. While the indicator doesn't have enough data to show consumer confidence over a business cycle, it does match the latest round of trade-war escalations, the economists wrote.

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