A key measure of U.S. consumer confidence rose to its highest level in two years in July despite rising interest rates. Perceptions of the state of the job market continued to improve.
The Conference Board reported that its Consumer Confidence Index climbed to 117 from 110.1 in June. “Consumer confidence rose in July 2023 to its highest level since July 2021, reflecting pops in both current conditions and expectations,” Dana Peterson, chief economist at The Conference Board, stated in a press release. “Headline confidence appears to have broken out of the sideways trend that prevailed for much of the last year. Greater confidence was evident across all age groups, and among both consumers earning incomes less than $50,000 and those making more than $100,000.
“Assessments of the present situation rose in July on brighter views of employment conditions, where the spread between consumers saying jobs are ‘plentiful’ versus ‘hard to get’ widened further,” Peterson added. “This likely reflects upbeat feelings about a labor market that continues to outperform. When asked about current family financial conditions [a measure not included in calculating the Present Situation Index], the share of respondents citing a ‘good’ situation rose, and those citing ‘bad’ conditions fell, signaling still-healthy family finances. This might reflect softening inflation and continued income support from employment.
“Expectations for the next six months improved materially, reflecting greater confidence about future business conditions and job availability,” Peterson continued. “This likely reveals consumers’ belief that labor market conditions will remain favorable. Expectations for future incomes ticked down slightly, a potential reflection of slower wage growth, compared to a year ago. The measure of expected family financial situation, six months hence [not included in the Expectations Index] also softened somewhat in July — despite further decline in the 12-month forward inflation expectations gauge.”
Meanwhile, a separate indicator of consumer sentiment also moved higher in July. The University of Michigan reported that its Consumer Sentiment Index rose to 71.6 from 64.4 in June. “Consumer sentiment rose for the second straight month, soaring 11% above June and reaching its most favorable reading since October 2021,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “All components of the index improved considerably, led by an 18% surge in long-term business conditions and 14% increase in short-run business conditions.
“Overall, the sharp rise in sentiment was largely attributable to the continued slowdown in inflation, along with stability in labor markets,” Hsu added. “However, sentiment for lower-income consumers fell. This group anticipates that inflation and their income prospects will both worsen in the year ahead, highlighting the heterogeneity of views across the population.”
The U.S. Department of Commerce reported that consumer spending rose 0.5% in June. Personal income rose 0.3% during the month. Inflation rose in June, but did so at its slowest pace in two years. The Personal Consumption Expenditures Price Index, excluding the volatile food and energy categories, climbed just 0.2% after rising 0.3% the prior month. The core PCE price index rose 4.1% on a year-over-year basis in June. That was the smallest increase in the annual rate since September 2021. The PCE is the Federal Reserve’s preferred inflation gauge.
“The inflation outbreak is winding down quicker and with less pain for the labor markets than economists could have imagined just a year ago,” Christopher Rupkey, chief economist at FWDBonds in New York, told Reuters. “This means policy-makers can most likely skip a rate hike at the upcoming September meeting.”
The Fed raised its benchmark interest rate by another quarter percent, to a range of 5.25% to 5.5%, in July.
The Conference Board reported that its Leading Economic Index declined by 0.7% in June, to 106.1, after a decline of 0.6% in May. “The U.S. LEI fell again in June, fueled by gloomier consumer expectations, weaker new orders, an increased number of initial claims for unemployment, and a reduction in housing construction,” Justyna Zabinska-La Monica, The Conference Board’s senior manager, business cycle indicators, stated in a press release.
“The Leading Index has been in decline for 15 months — the longest streak of consecutive decreases since 2007-08, during the run-up to the Great Recession,” Zabinska-La Monica added. “Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the U.S. economy is likely to be in recession from Q3 2023 to Q1 2024. Elevated prices, tighter monetary policy, harder-to-get credit and reduced government spending are poised to dampen economic growth further.”
The mood at the nation’s small businesses improved in June. The National Federation of Independent Business reported that its Small Business Optimism Index rose 1.6 points, to 91, although it marked the 18th consecutive month that the index has been below the 49-year average of 98.
“Halfway through the year, small-business owners remain very pessimistic about future business conditions and their sales prospects,” NFIB chief economist Bill Dunkelberg stated in a press release. “Inflation and labor shortages continue to be great challenges for small businesses. Owners are still raising selling prices at an inflationary level to try to pass on higher inventory, labor and energy costs.”
Inflation and labor quality were the top small-business concerns during the month, as 24% of member owners reported one of them as their most important problem. Forty-two percent of member owners said they had job openings that were hard to fill. That was down 2% from May, but the NFIB reported that the percentage remained historically high. A net 36% of owners, seasonally adjusted, said they raised pay during the month, down 5% from May.
Confidence among the nation’s home builders edged higher in July. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index rose one point, to 56, marking the seventh straight month that it has increased. “The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers,” NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala., stated in a press release. “At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.”
NAHB chief economist Robert Dietz added: “Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop-and-start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle.”
The HMI’s component indexes were mixed in July. The index that gauges current sales conditions rose one point, to 62; the index that charts sales expectations in the next six months fell two points, to 60; and the index that measures the traffic of prospective buyers climbed three points, to 40. 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 2.5% in June, to a seasonally adjusted annual rate of 697,000. “Rising mortgage rates in June, coupled with elevated construction costs and supply-chain issues for electrical transformers, acted as headwinds on the new-home sales market,” Huey stated in a press release.
Danushka Nanayakkara-Skillington, the NAHB’s assistant vice president for forecasting and analysis, added: “Demand for new homes cooled in June primarily due to a more than quarter-point rise in mortgage rates over the previous month. However, the lack of existing inventory and the Federal Reserve nearing the end of its rate hikes signal that demand for new homes may rise in the coming quarters.”
The median sale price for a new home was $415,400, down about 4% from the same month a year earlier. Existing-home sales also declined in June. The National Association of Realtors reported that sales dropped 3.3%, to a seasonally adjusted annual rate of 4.16 million. “The first half of the year was a downer for sure, with sales lower by 23%,” NAR chief economist Lawrence Yun stated in a press release. “Fewer Americans were on the move despite the usual life-changing circumstances. The pent-up demand will surely be realized soon, especially if mortgage rates and inventory move favorably.”
The NAR reported that the median existing-home price was $410,200 in June, down 0.9% from the same month a year earlier.
This article was originally published in the September 2023 issue.
