A key indicator of U.S. consumer confidence worsened in February after three consecutive months of improvement as concerns about the job market and national politics weighed on people’s minds. The Conference Board reported that its Consumer Confidence Index dropped to 106.7 from a downwardly revised 110.9 in January.
“The decline in consumer confidence in February interrupted a three-month rise, reflecting persistent uncertainty about the U.S. economy,” Dana Peterson, chief economist at The Conference Board, stated in a press release. “The drop in confidence was broad-based, affecting all income groups except households earning less than $15,000 and those earning more than $125,000. Confidence deteriorated for consumers under the age of 35 and those 55 and over, whereas it improved slightly for those aged 35 to 54.
“February’s write-in responses revealed that while overall inflation remained the main preoccupation of consumers, they are now a bit less concerned about food and gas prices, which have eased in recent months,” Peterson added. “But they are more concerned about the labor market situation and the U.S. political environment.”
A separate indicator of consumer sentiment was also lower in February, but not to a significant degree. The University of Michigan reported that its Consumer Sentiment Index declined to 76.9 from 79.0 in January.
“Consumer sentiment moved sideways [in February], slipping just two index points below January and holding the gains in sentiment seen over the past three months,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “Expected business conditions remained substantially higher than last autumn, with short-run expectations now 63% above and long-run expectations 46% above November 2023 readings. For all but one index component, readings this month were higher than all values between mid-2021 and the end of 2023.
“Consumers perceived few changes in the state of the economy since the start of the new year, and they appear to be assured that inflation will continue on a favorable trajectory,” Hsu added. “Sentiment is currently eight points shy of the historical average since 1978.”
The U.S. Commerce Department reported that retail sales fell by a sharp 0.8% in January after a 0.4% increase the previous month, during the traditionally strong Christmas holiday season.
“It’s a weak report, but not a fundamental shift in consumer spending,” Robert Frick, corporate economist for Navy Federal Credit Union, told CNBC. “December was high due to holiday shopping, and January saw drops in those spending categories, plus frigid weather plus an unfavorable seasonal adjustment. Consumer spending likely won’t be great this year, but with real wage gains and increasing employment, it should be plenty to help keep the economy expanding.”
Inflation rose at a rate that economists expected in January. The U.S. Department of Commerce reported that the Personal Consumption Expenditures Price Index rose 0.3%, and by 2.4% from the same month a year earlier. The core PCE index, which excludes the volatile food and energy categories, rose by 0.4%, and by 2.8% from the same month a year earlier. The PCE is the Federal Reserve’s preferred inflation gauge.
“For markets keenly focused on when the Fed will transition toward easing rates, this report will help restore confidence that it isn’t if the Fed will begin to cut rates in 2024, but when,” Quincy Krosby at LPL Financial told Bloomberg.
The Conference Board reported that its Leading Economic Index fell by 0.4% in January, to 102.7, after a 0.2% decline in December, although the board added that the additional decline was not a signal of an impending recession.
“The U.S. LEI fell further in January, as weekly hours worked in manufacturing continued to decline and the yield spread remained negative,” Justyna Zabinska-La Monica, senior manager, business cycle indicators, stated in a press release.
“While the declining LEI continues to signal headwinds to economic activity, for the first time in the past two years, six out of its 10 components were positive contributors over the past six-month period [ending in January]. As a result, the leading index currently does not signal recession ahead. While no longer forecasting a recession in 2024, we do expect real GDP growth to slow to near zero percent over Q2 and Q3.”
The mood at the nation’s small businesses darkened in January. The National Federation of Independent Business reported that its Small Business Optimism Index fell two points, to 89.9, marking the 25th consecutive month that the index has been below the 50-year average of 98.
“Small-business owners continue to make appropriate business adjustments in response to the ongoing economic challenges they’re facing,” NFIB chief economist Bill Dunkelberg stated in a press release. “In January, optimism among small business owners dropped as inflation remains a key obstacle on Main Street.”
Twenty percent of owners reported that inflation was their most serious business problem, down 3% from the previous month. Labor quality was rated the top problem by 21% of respondents. Thirty-nine percent of owners reported job openings that they could not fill. A net 26% of owners, seasonally adjusted, said they planned to raise pay during the next three months.
Confidence among the nation’s home builders improved in February. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index rose by four points, to 48.
“Buyer traffic is improving, as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala., stated in a press release. “And while mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year.”
NAHB chief economist Robert Dietz added: “With future expectations of Fed rate cuts in the latter half of 2024, the NAHB is forecasting that single-family starts will rise about 5% this year. But as builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages. And as a further reminder that the recovery will be bumpy as buyers remain sensitive to interest-rate and construction-cost changes, the 10-year Treasury rate is up more than 40 basis points since the beginning of the year.”
All three of the major HMI indexes rose in February. The index that charts current sales conditions climbed four points, to 52; the component that measures sales expectations during the next six months rose three points, to 60; and the component that gauges the traffic of prospective buyers rose four points, to 33. 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 by a modest 1.5% in January, to a seasonally adjusted annual rate of 661,000. The pace of sales was up 1.8% from the same month a year earlier.
“The new side of the housing market continues to greatly outperform when measured against the market for existing homes,” Daniel Vielhaber, an economist at Nationwide, told Reuters. “As the existing home inventory shortage persists, buyers continue to be pushed into the market for new homes.”
The median new home sale price in January was $420,700, up 1.8% from December but down 2.6% from the same month a year earlier. The National Association of Realtors reported that existing home sales also rose in January, climbing 3.1% to a seasonally adjusted annual rate of 4 million.
“While home sales remain sizably lower than a couple of years ago, January’s monthly gain is the start of more supply and demand,” NAR chief economist Lawrence Yun stated in a press release. “Listings were modestly higher, and home buyers are taking advantage of lower mortgage rates, compared to late last year.”
The median existing home sale price climbed 5.1%, to $379,100, from the same month a year earlier. “The median home price reached an all-time high for the month of January,” Yun added. “Multiple offers are common on midpriced homes, and many homes were still sold within a month. The elevated share of cash deals — 32% — indicated a market full of multiple offers and propelled by record-high housing wealth.”
First-time buyers were responsible for 28% of sales in January, down from 31% in the same month a year earlier.
This article was originally published in the April 2024 issue.
