Sutthiphong - stock.adobe.comA key indicator of U.S. consumer confidence remained steady in March as older people proved more optimistic and middle-income consumers were less hopeful about the direction of the economy. The Conference Board reported that its Consumer Confidence Index was at 104.7 for the month, essentially unchanged from a downwardly revised 104.8 in February.
“Consumers’ assessment of the present situation improved in March, but they also became more pessimistic about the future,” Dana M. Peterson, chief economist at The Conference Board, stated in a press release. “Confidence rose among consumers aged 55 and over but deteriorated for those under 55. Separately, consumers in the $50,000 to $99,999 income group reported lower confidence in March, while confidence improved slightly in all other income groups.
“However, over the last six months, confidence has been moving sideways with no real trend to the upside or downside either by income or age group,” Peterson added. “Consumers remained concerned with elevated price levels, which predominated write-in responses. March’s write-in responses showed an uptick in concerns about food and gas prices, but in general complaints about fuel prices have been trending downward. Indeed, average 12-month inflation expectations came in at 5.3% — barely changed from February’s four-year low of 5.2%. Recession fears continued to trend downward both in write-in responses and as measured by consumers’ perceived likelihood of a U.S. recession over the next 12 months. Meanwhile, consumers expressed more concern about the U.S. political environment, compared to prior months.”
Meanwhile, a separate indicator of consumer sentiment rose modestly, but nonetheless reached its highest level since July 2021. The University of Michigan reported that its Consumer Sentiment Index climbed to 79.4 from 76.9 in February.
“Critically, consumers exhibited confidence that inflation will continue to soften,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “Assessments and expectations of personal finances improved modestly from last month, as the perceived negative effects of high prices and expenses on living standards eased. Strong stock market performance [in March] supported sentiment gains only for those with the largest holdings, with little impact on the index.
“Overall, sentiment is essentially unchanged throughout the first quarter of 2024, remaining just above the midpoint between the prepandemic level of sentiment and the historic trough from June 2022,” Hsu added. “This stability reflects a perception among consumers that the economy has been holding steady in its current state. As the election season progresses and debates over economic policy become more salient for consumers, their outlook for the economy could become more volatile in the months ahead.”
The U.S. Commerce Department reported that retail sales rose 0.6% in February, less than analysts expected, while sales for January were revised downward to a 1.1% decline.
“There’s ultimately more competition for consumers’ dollars today, while still-high prices for frequent purchases like food and gasoline may be diverting discretionary funds, just as higher interest payments may also be somewhat crowding out consumption,” Tim Quinlan, a senior economist at Wells Fargo, told Reuters.
Inflation rose moderately in February. The Commerce Department reported that the Personal Consumption Expenditures Price Index climbed 0.3%. On a year-over-year basis, the PCE index was up 2.5%. The core PCE index, which strips out the volatile food and energy categories, also rose 0.3% and was up 2.8% on a year-over-year basis.
The Federal Reserve has as its goal an inflation rate of 2.0%. The PCE is the Fed’s preferred inflation gauge. “Core services inflation is slowing and will likely continue throughout the year,” Jeffrey Roach, chief economist at LPL Financial in Charlotte, N.C., told Reuters. “By the time the Fed meets in June, the data should be convincing enough for them to commence its rate normalization process.”
Fed chairman Jerome Powell, on March 29, said: “The fact that the U.S. economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates.”
The Commerce Department reported that consumer spending, which accounts for about 70% of U.S. economic activity, rose 0.8% in February. It was the largest gain since January 2023. “As long as employment growth remains strong, it can underpin solid spending. However, consumers overall are not prepared for a weakening in the labor market should it unfold,” Kathy Bostjancic, chief economist at Nationwide, told Reuters.
The Conference Board reported that its Leading Economic Index rose by a slight 0.1% in February, to 102.8, after a decline of 0.4% in January. “The U.S. LEI rose in February 2024 for the first time since February 2022,” Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board, stated in a press release. “Strength in weekly hours worked in manufacturing, stock prices, the Leading Credit Index and residential construction drove the LEI’s first monthly increase in two years. However, consumers’ expectations and the Institute for Supply Management Index of New Orders have yet to recover, and the six- and 12-month growth rates of the LEI remain negative. Despite February’s increase, the index still suggests some headwinds to growth going forward. The Conference Board expects annualized U.S. GDP growth to slow over the Q2 to Q3 2024 period, as rising consumer debt and elevated interest rates weigh on consumer spending.”
The mood at the nation’s small businesses was again less optimistic in February. The National Federation of Independent Business reported that its Small Business Optimism Index declined slightly, to 89.4, from 89.9 in January. That marked the 26th consecutive month that the index has been below its 50-year average of 98.
“While inflation pressures have eased since peaking in 2021, small business owners are still managing the elevated costs of higher prices and interest rates,” NFIB chief economist Bill Dunkelberg stated in a press release. “The labor market has also eased slightly, as small business owners are having an easier time attracting and retaining employees.”
Twenty-three percent of owners reported that inflation was their most serious business problem, up 3% from the previous month. Sixteen percent said labor quality was their most serious problem. That was down 5% from the previous month and was the lowest reading since April 2020.
Thirty-seven percent of owners, seasonally adjusted, reported job openings that they could not fill. That was down 2% from January and was the lowest reading since January 2021.
A net 35% of owners, seasonally adjusted, reported raising pay in February, down 4% from January and the lowest reading since May 2021. A seasonally adjusted 19% of owners planned to raise pay during the next three months.
Confidence among the nation’s home builders continued to improve in March. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index rose three points, to 51. It was the fourth consecutive monthly gain for the index and raised it to its highest level since July of last year.
“Buyer demand remains brisk, and we expect more consumers to jump off the sidelines and into the marketplace if mortgage rates continue to fall later this year,” NAHB chairman Carl Harris, a custom home builder from Wichita, Kan., stated in a press release. “But even though there is strong pent-up demand, builders continue to face several supply-side challenges, including a scarcity of buildable lots and skilled labor, and new restrictive codes that continue to increase the cost of building homes.”
NAHB chief economist Robert Dietz added: “With the Federal Reserve expected to announce future rate cuts in the second half of 2024, lower financing costs will draw many prospective buyers into the market. However, as home building activity picks up, builders will likely grapple with rising material prices, particularly for lumber.”
All three of the major HMI indexes posted gains in March. The index that charts current sales conditions climbed four points, to 56; the index that measures sales expectations in the next six months rose two points, to 62; and the index that gauges the traffic of prospective buyers added two points, to 34. Any number above 50 indicates that more builders view conditions as good rather than poor.
The Commerce Department reported that sales of new homes fell slightly in February, dropping 0.3%, to a seasonally adjusted annual rate of 662,000. The pace of sales was, however, up 5.9% from the same month a year earlier.
“While new-home sales remained flat in February, our latest home builder surveys show increased levels of confidence driven by the ongoing lean levels of existing home inventory,” Harris said. “As interest rates subside over the course of 2024, additional home buyers will be priced into the market and new construction will be needed to meet this demand.”
Dietz added: “A slight uptick in mortgage rates held back the pace of new-home sales in February. Our latest builder surveys show that roughly one-quarter of builders reported cutting home prices in March. The price cuts, in combination with building slightly smaller homes, can be seen in today’s data that show a 7.6% year-over-year decline for median new home prices.”
The median new home sale price was $400,500 in February. The National Association of Realtors reported that existing-home sales rose sharply in February, rising 9.5%, to a seasonally adjusted annual rate of 4.38 million.
“Additional housing supply is helping to satisfy market demand,” NAR chief economist Lawrence Yun stated in a press release. “Housing demand has been on a steady rise due to population and job growth, though the actual timing of purchases will be determined by prevailing mortgage rates and wider inventory choices.”
The median existing-home sale price was $384,500, which was up 5.7% from the same month a year earlier. The NAR says it marked the eighth month in a row of year-over-year price gains.
This article was originally published in the May 2024 issue.
