A key measure of U.S. consumer confidence slipped in January as the omicron variant of the coronavirus continued to penetrate the nation. The Conference Board reported that its Consumer Confidence Index fell to 113.8 from 115.2 in December.
“Consumer confidence moderated in January, following gains in the final three months of 2021,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The Present Situation Index improved, suggesting the economy entered the new year on solid footing. However, expectations about short-term growth prospects weakened, pointing to a likely moderation in growth during the first quarter of 2022. Nevertheless, the proportion of consumers planning to purchase homes, automobiles and major appliances over the next six months all increased.
“Meanwhile, concerns about inflation declined for the second straight month but remain elevated after hitting a 13-year high in November 2021,” she added. “Concerns about the pandemic increased slightly amid the ongoing omicron surge. Looking ahead, both confidence and consumer spending may continue to be challenged by rising prices and the ongoing pandemic.”
A separate reading of the consumer’s mood also retreated in January. The University of Michigan reported that its Consumer Sentiment Index fell to 67.2 from 70.6 in December. “Sentiment fell throughout January, posting a cumulative loss of 4.8 percent, sinking to its lowest level since November 2011,” Richard Curtin, chief economist of the university’s Surveys of Consumers, stated in a press release. “The current slump was due to two sharp declines separated by a brief interlude of rising optimism. The initial steep decline occurred in just two months, a 28.9 percent plunge in optimism from February to April 2020 due to the shutdown in the economy. Confidence recorded an equally strong recovery beginning in late 2020, rising 23 percent by April 2021. That upturn was reversed during the past nine months, with the Sentiment Index falling by 23.9 percent.
“The delta and omicron variants were largely responsible, but other factors, some of which were initially triggered by Covid, have become independent forces shaping sentiment,” Curtin added. “While supply chains and essential workers have sparked the initial increases in prices and wages, a wage-price spiral that has subsequently developed is no longer tied to those precipitating conditions. Household spending had been supported by an extraordinary pace of rising home and stock prices that is likely to turn negative in the year ahead. Overall confidence in government economic policies is at its lowest level since 2014, and the major geopolitical risks may add to the pandemic active confrontations with other countries.”
Kevin Carlan, president of Yanmar Mastry Engine Center in Clearwater, Fla., said he was upbeat about the economy’s prospects in 2022. “I think it’s very, very healthy,” he said. “I think we’ll have another year of fine sales.”
When he assesses his company’s prospects, Carlan particularly watches automotive and recreational vehicle sales. “Anything dealing with recreation, we’re going to track pretty closely,” he said.
Carlan said the pandemic has had mixed effects on the company. “Overall the pandemic has been very good for business,” he said, adding that it’s been challenging to hire for open positions, and to deal with shipment delays of 10 to 12 weeks. Even still, he added, “Compared with 2019, profitability is way up.”
The U.S. Department of Commerce reported that consumer spending fell 0.6 percent in December after a gain of the same amount in November. Personal incomes rose 0.3 percent in December. Inflation rose in December. The Personal Consumption Expenditures Price Index, excluding the volatile food and energy components, climbed 0.5 percent. In the 12-month period through December, the core PCE inflation rate rose 4.9 percent, the highest since September of 1983. The PCE index is the Federal Reserve’s preferred inflation gauge.
“The challenge now is to tamp down inflation without allowing the flame on the overall economy to go out,” Diane Swonk, chief economist at Grant Thornton in Chicago, told Reuters.
The Fed could decide to raise interest rates as early as March in an effort to fight inflation. “I would say the [Federal Open Market Committee] is of a mind to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so,” Fed chairman Jerome Powell said at a Jan. 26 press conference after the committee, the Fed’s rate-setting body, held a two-day meeting.
The Conference Board reported that its Leading Economic Index rose 0.8 percent in December, to 120.8, after increases of 0.7 percent in October and November. The index attempts to predict future economic activity. “The U.S. LEI ended 2021 on a rising trajectory, suggesting the economy will continue to expand well into the spring,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “For the first quarter, headwinds from the omicron variant, labor shortages and inflationary pressures — as well as the Federal Reserve’s expected interest rate hikes — may moderate economic growth. The Conference Board forecasts GDP growth for Q1 2022 to slow to a relatively healthy 2.2 percent (annualized). Still, for all of 2022, we forecast the U.S. economy will expand by a robust 3.5 percent — well above the prepandemic trend growth.”
The mood among the nation’s small businesses improved slightly in December. The National Federation of Independent Business reported that its Small Business Optimism Index rose 0.5 points, to 98.9. “Small businesses unfortunately saw a disappointing December jobs report, with staffing issues continuing to impact their ability to be fully productive,” NFIB chief economist Bill Dunkelberg stated in a press release. “Inflation is at the highest level since the 1980s and is having an overwhelming impact on owners’ ability to manage their businesses.”
Forty-nine percent of business owners in the NFIB reported job openings in December that they could not fill. A net 48 percent of owners said they raised employee pay during the month, with it being at a 48-year record high.
Confidence among the nation’s home builders declined in January. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index fell one point, to 83. “Higher material costs and lack of availability are adding weeks to typical single-family construction times,” NAHB chairman Chuck Fowke stated in a press release. “NAHB analysis indicates the aggregate cost of residential construction materials has increased almost 19 percent since December 2020. Policy-makers need to take action to fix supply chains. Obtaining a new softwood lumber agreement with Canada and reducing tariffs is an excellent place to start.”
Added NAHB chief economist Robert Dietz: “The HMI data was collected during the first two weeks of January and do not fully reflect the recent jump in mortgage interest rates. While lean existing home inventory and solid buyer demand are supporting the need for new construction, the combination of ongoing increases for building materials, worsening skilled-labor shortages and higher mortgage rates point to declines for housing affordability in 2022.”
The HMI index that gauges current sales conditions was unchanged at 90; the gauge that measures sales expectations in the next six months dropped two points, to 83; and the component that charts the traffic of prospective buyers also fell two points, to 69. Any number above 50 indicates that more builders view conditions as good rather than poor.
The Commerce Department reported that sales of new homes rose 12 percent in December, to a seasonally adjusted annual rate of 811,000. The median price of a new home sold in December was $377,700. Existing-home sales fell in December after three consecutive months of gains. They dropped 4.6 percent from November to a seasonally adjusted annual rate of 6.18 million.
“December saw sales retreat, but the pullback was more a sign of supply constraints than an indication of a weakened demand for housing,” Lawrence Yun, the NAR’s chief economist, stated in a press release. “Sales for the entire year finished strong, reaching the highest annual level since 2006.
“This year, consumers should prepare to endure some increases in mortgage rates,” Yun added. “I also expect home prices to grow more moderately by 3 percent to 5 percent in 2022, and then similarly in 2023 as more supply reaches the market.”
This article was originally published in the March 2022 issue.
