Confidence Hits 18-year High After Months of Declines

A widely followed measure of consumer confidence rebounded strongly in February, and Federal Reserve Chairman Jerome Powell voiced optimism in congressional testimony that the U.S. economy will continue to expand solidly this year, though perhaps at a slower pace.

The Conference Board reported that its Consumer Confidence Index rose from 121.7 in January to 131.4 in February. The gauge of Americans’ views on present conditions rose to an 18-year high.

“Consumer confidence rebounded in February, following three months of consecutive declines,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release.

“The Present Situation Index improved, as consumers continue to view both business and labor market conditions favorably,” she added. “Expectations, which had been negatively impacted in recent months by financial market volatility and the government shutdown, recovered in February. Looking ahead, consumers expect the economy to continue expanding. However, according to The Conference Board’s economic forecasts, the pace of expansion is expected to moderate in 2019.”

The U.S. Commerce Department reported that the nation’s gross domestic product declined, with growth at an annual rate of 2.6 percent in the fourth quarter of last year compared with 3.4 percent in the previous quarter.

“I think this is a slowing,” Lewis Alexander, chief U.S. economist for the global investment bank Nomura, told The New York Times. “I don’t think this is ‘we’re falling into an abyss.’”Growth for all of 2018 was at a pace of 2.9 percent, up from 2.2 percent in 2017. Tax cuts that encouraged consumer and business spending, and increases in government spending, helped to boost gross domestic product last year.

Powell, delivering the Federal Reserve’s semiannual monetary report to the U.S. Congress in late February, said the economy grew at a “strong pace” last year, but he also said recent months have presented challenges.

“While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals,” Powell said. “Financial markets became more volatile toward year end [2018], and financial conditions are now less supportive of growth than they were earlier last year.

Growth has slowed in some major foreign economies, particularly China and Europe. And uncertainty is elevated around several unresolved government policy issues, including Brexit and ongoing trade negotiations.”

Separately, Powell said the central bank would be “patient” in deciding future policy on interest rates.

“When I say that we are going to be patient, what that really means is that we are in no rush to make a judgment about changes in policy,” he said. “We are going to be patient. We are going to allow the situation to evolve … and allow the data to come in. And I think we are in a very good place to do that.”

Powell’s remarks came after a January meeting at which the Federal Open Market Committee, the Fed’s rate-setting body, decided to pause its policy of gradual rate hikes. The target federal funds rate is now at a range of 2.25 percent to 2.5 percent.

Powell said the decision to step back, for now, on rate hikes was in response to “muted” inflation and concerns about “global economic and financial developments.”

“Wages have moved up. We welcome that,” he said. “We don’t find it troubling from an inflation standpoint.”

The Conference Board reported that its Leading Economic Index declined 0.1 percent in January, to 111.3, according to preliminary estimates. The index attempts to predict economic activity.

“Based on preliminary data, the U.S. LEI declined very slightly in January, and December’s decline was revised up to no change,” Ataman Ozyildirim, director of economic research at The Conference Board, stated in a press release. “In January, the strengths in the financial components were offset by the weaknesses in the labor market components. The U.S. LEI has now been flat essentially since October 2018. The Conference Board forecasts that U.S. GDP growth will likely decelerate to about 2 percent by the end of 2019.”

John Giglio, president and CEO of Freedom Boat Club, said “the U.S. economy is still reasonably healthy, but there are signs of a slowdown. As we continue to monitor the recreational vehicle and marine sectors, there is still consumer demand for both products, but it appears the supply chain is shifting slightly toward a push instead of the pull, unlike what we have seen in recent years.

“As consumer confidence declines, people put off the large-ticket purchases like boats until there is more economic certainty,” Giglio added.  “When the economy contracts, our business tends to increase at a higher rate than in a bullish economy. At the moment, our business is healthy and growing, but we have carved out a niche segment of the industry that operates outside the traditional economic cycle.”

Giglio said Freedom Boat Club watches consumer confidence, interest rates and the housing market, and closely monitors the RV sector. 

“Historically, the recreational marine industry lags about six months behind the RV trends,” he said.

Giglio says Freedom Boat Club had a strong year in 2018 that marked its 10th successive year of double-digit revenue growth and strong profit growth.

“As the economic uncertainty continues, we are poised for another strong year,” he said.

Giglio added that domestically, there has been little impact on Freedom Boat Club from President Trump’s tariffs “outside some minimal price increases on some of the boat lines we source. Internationally, specifically in Canada, we have struggled. Since the majority of boats we purchase across the franchise network are made in the U.S., our Canadian franchise partners have had to hold off on new boats or be subject to paying higher prices than in the past.” 

The University of Michigan’s Consumer Sentiment Index was at 93.8 at the end of February, up from 91.2 at the end of January but below the mid-month February reading of 95.5.

“Although sentiment was still above last month’s low, the bounce-back from the end of the federal shutdown faded in late February,” Richard Curtin, chief economist of the university’s Surveys of Consumers, stated in a press release. “While the overall level of confidence remains diminished, it is still quite positive.”

The mood of the small-business community darkened in January. The National Federation of Independent Business reported that its Small Business Optimism Index fell 3.2 points, to 101.2. It was the lowest reading since the weeks that led up to the presidential election in 2016.

According to the NFIB, the lower reading indicated uncertainty among small business owners because of the 35-day partial government shutdown and instability in the financial markets.

“Business operations are still very strong, but small business owners’ expectations about the future are shaky,” NFIB President and CEO Juanita D. Duggan stated in a press release. “One thing small businesses make clear to us is their dislike for uncertainty, and while they are continuing to create jobs and increase compensation at a frenetic pace, the political climate is affecting how they view the future.”

The NFIB also reported that business owners expressed concerns about future sales growth and business conditions later in the year, although hiring, hiring plans and job openings remained strong, and inventory spending and capital spending were solid.

“Although January’s index showed some positive developments among current business conditions, the return to divided government in Washington created an inability to agree on basic policy measures,” NFIB Chief Economist Bill Dunkelberg stated in a press release. “This produced the longest partial government shutdown in history, elevating the level of uncertainty, which is damaging to economic activity.”

Falling gasoline prices helped to restrain inflation in January. The U.S. Department of Labor reported that the Consumer Price Index was flat for the month, further reducing the pressure on the Federal Reserve for any increase in interest rates in the near future. For the 12-month period through January, the CPI rose just 1.6 percent.

“Inflation still appears to be well in check,” Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Mich., told Reuters. “That should be enough for the Fed to take time to evaluate the gradual effects of its prior rate hikes and move more slowly and thoughtfully in administering rate policy in the months ahead.”

The so-called core rate of inflation, a measure that strips out volatile food and energy prices, rose 0.2 percent in January. The yearly increase in the core rate was 2.2 percent.

In a report delayed by the government shutdown, the U.S. Department of Commerce reported that retail sales fell 1.2 percent in December. It was the largest monthly drop since September 2009, shortly after the Great Recession ended.

Sales declined in every category except auto dealers (up 1 percent) and home centers (up 0.3 percent). Sales fell 3.3 percent at department stores.

December also saw sharp declines in the financial markets, and the stock losses may have weighed on shoppers.

“The most plausible economic explanation is that long-dormant wealth effects came back with a vengeance, and consumers slashed their holiday purchases when they saw their 401(k)s going down the drain,” Michael Feroli, an economist at JPMorgan Chase, told Reuters.

In the housing market, builder confidence in the market for newly built single-family homes rose four points in February, to 62, on the National Association of Home Builders/Wells Fargo Housing Market Index.

“Ongoing reduction in mortgage rates in recent weeks, coupled with continued strength in the job market, are helping to fuel builder sentiment,” NAHB Chairman Randy Noel, a custom home builder from LaPlace, La., stated in a press release. “In the aftermath of the fall slowdown, many builders are reporting positive expectations for the spring selling season.”

All of the housing market indices posted gains in February for the second month in a row. The index measuring current sales conditions rose three points, to 67; the component gauging expectations in the next six months increased five points, to 68; and the metric charting buyer traffic moved up four points, to 48.

Any score above 50 indicates that more builders view conditions as good rather than poor.

“Builder confidence levels moved up in tandem with growing consumer confidence and falling interest rates,” NAHB Chief Economist Robert Dietz stated in a press release. “The five-point jump on the six-month sales expectation for the HMI is due to mortgage interest rates dropping from about 5 percent in November to 4.4 percent [during the week of February 18]. However, affordability remains a critical issue. Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points.”

Existing-home sales fell in January for the third month in a row. The National Association of Realtors reported that sales decreased 1.2 percent from December, to a seasonally adjusted annual rate of 4.94 million. Sales were down 8.5 percent from 5.4 million in January 2018.

Lawrence Yun, the NAR’s chief economist, stated in a press release that the January figure was the lowest since November 2015. He did not expect the numbers to decline further in future months.

“Existing home sales in January were weak compared to historical norms; however, they are likely to have reached a cyclical low,” Yun stated. “Moderating home prices, combined with gains in household income, will boost housing affordability, bringing more buyers to the market in the coming months.”

The median existing-home price for all types of housing in January was $247,500, up 2.8 percent from $240,800 in January 2018. January’s price increase marked the 83rd straight month of year-over-year gains.

The U.S. Commerce Department’s report on new-home sales for January was not available. It was delayed by the government shutdown.

This article originally appeared in the April 2019 issue.