A key indicator of U.S. consumer confidence surged in December as the economy added 216,000 jobs, substantially exceeding economists’ expectations. The Conference Board reported that its Consumer Confidence Index climbed to 110.7 from a downwardly revised 101 in November.
“December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market and personal income prospects over the next six months,” Dana Peterson, chief economist at The Conference Board, stated in a press release.
“While December’s renewed optimism was seen across all ages and household income levels, the gains were largest among householders aged 35 to 54, and households with income levels of $125,000 and above,” Peterson added. “December’s write-in responses revealed the top issue affecting consumers remains rising prices in general, while politics, interest rates and global conflicts all saw downticks as top concerns. Consumers’ perceived likelihood of a U.S. recession over the next 12 months abated in December to the lowest level seen this year — though two-thirds still perceive a downturn is possible in 2024.
“Consumer expectations for the next six months also increased in December, reflecting improved confidence about future business conditions, job availability and incomes,” Peterson continued. “Expectations that interest rates will rise in the year ahead plummeted to the lowest levels since January 2021, and consumers’ outlook for stock prices rose to levels of optimism last seen in mid-2021. Meanwhile, average 12-month inflation expectations continued to recede, and it now stands at 5.6%. Consumers’ views of their expected family financial situation six months hence (not included in calculating the Expectations Index) also improved in December. Likewise, on a
month-to-month basis, buying plans for autos, homes and big-ticket appliances rose moderately across the board, ending the year on a slightly more positive note.”
A separate indicator of consumer sentiment also rose significantly in December. The University of Michigan reported that its Consumer Sentiment Index increased from 61.3 in November to 69.7 in December.
“Consumer sentiment confirmed its mid-month reading and soared 14% in December, reversing all declines from the previous four months,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “These trends are rooted in substantial improvements in how consumers view the trajectory of inflation. All five index components rose [in December], which has only occurred in 10% of readings since 1978.”
“Expected business conditions surged over 25% for both the short and long run,” Hsu added. “All age, income, education, geographic and political identification groups saw gains in sentiment [in December]. The index is now just shy of the midpoint between the prepandemic reading and the historic low reached in June 2022. Year-ahead inflation expectations plunged from 4.5% [in November] to 3.1% [in December]. The current reading is the lowest since March 2021 and sits just above the 2.3% to 3% range seen in the two years prior to the pandemic.”
The U.S. Department of Labor reported that the unemployment rate was unchanged from November at 3.7%. The economy averaged 225,000 new jobs a month in 2023. The government revised downward its job totals for October and November. The new October total is 105,000, down from the originally reported 150,000, and the November total was revised down to 173,000 from 199,000. The department reported that government employment increased by 52,000 in December. Other notable increases occurred in health care (38,000), social assistance (21,000) and construction (17,000).
“In many ways, the labor market is at its best place it has been, not only since [before Covid-19], but by some measures in decades,” Diane Swonk, chief economist at accounting giant KPMG, told The Washington Post.
The continuing strength of the job market put a damper on sentiment that the Federal Reserve would cut interest rates when its policymaking committee next meets in March. The Jan. 5 “report speaks to the bumpy road ahead for the Fed’s journey back to 2% inflation,” Andrew Patterson, senior international economist at Vanguard, told CNBC. “The decision of when to first cut policy rates remains one for the second half of the year, in our view.”
The Labor Department reported that average hourly earnings rose by 15 cents to $34.27, in December, exceeding expectations. During the 12-month period through December, average hourly earnings increased by 4.1%. The strong pay gains that union autoworkers obtained after their six-week strike against major U.S. vehicle builders contributed to the national improvement.
The U.S. Department of Commerce reported that consumer spending, which represents more than two-thirds of U.S. economic activity, rose 0.3% in November. Personal income rose 0.4%.
“The resilience of the consumer provides credibility to the Fed achieving a soft landing but should also be a signal to markets that the Fed is not likely to cut rates as quickly and as much as the markets now have priced in,” Kathy Bostjancic, chief economist at Nationwide, told Reuters. “The stronger economic activity remains, the slower inflation declines, and the slower the Fed responds with rate cuts.”
Inflation declined slightly in November. The Commerce Department reported that the Personal Consumption Expenditures Price Index fell 0.1%, marking the first decline since April 2020. Inflation had been flat in October. The core PCE index, which strips out volatile food and energy prices, rose 0.1% for the month and was up 3.2% from the same month a year earlier. That was the smallest annual rise since April 2021. The PCE index is the Federal Reserve’s preferred inflation gauge.
Federal Reserve chairman Jerome Powell “couldn’t have asked for a better present this year,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, told Reuters in response to the PCE index data. “So far at least, the endgame is turning out better than the Fed or nearly anyone could have imagined at the start of the year. While the Fed won’t rush into cutting rates, it’s likely now just a matter of time.”
Nonetheless, The Conference Board reported that its Leading Economic Index fell by 0.5% in November, to 103, after a downwardly revised decline of 1% in October. “The U.S. LEI continued declining in November, with stock prices making virtually the only positive contribution to the index in the month,” Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board, stated in a press release.
“Housing and labor market indicators weakened in November, reflecting warning areas for the economy,” Zabinska-La Monica added. “The Leading Credit Index and manufacturing new orders were essentially unchanged, pointing to a lack of economic growth momentum in the near term. Despite the economy’s ongoing resilience — as revealed by the U.S. Coincident Economic Index — and December’s improvement in consumer confidence, the U.S. LEI suggests a downshift of economic activity ahead. As a result, The Conference Board forecasts a short and shallow recession in the first half of 2024.”
The mood at the nation’s small businesses darkened slightly in November. The National Federation of Independent Business reported that its Small Business Optimism Index fell 0.1 points, to 90.6. It marked the 23rd consecutive month that the index has been below its 50-year average of 98.
“Job openings on Main Street remain elevated, as the economy saw a strong third quarter,” NFIB chief economist Bill Dunkelberg stated in a press release. “However, even with the growing economy, small business owners have not seen a strong wave of workers to fill their open positions. Inflation also continues to be an issue among small businesses.”
Twenty-two percent of member business owners said inflation was their most important business problem, a percentage that was unchanged from the previous month. Forty percent of owners reported job openings that were hard to fill, down 3% from the previous month. A net 36% of owners, seasonally adjusted, reported raising pay in November, a figure that was flat from the preceding month.
Confidence among the nation’s home builders improved in December. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index rose three points, to 37. It was the first rise in sentiment in five months.
“With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look,” NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala., stated in a press release. “With the nation facing a considerable housing shortage, boosting new-home production is the best way to ease the affordability crisis, expand housing inventory and lower inflation.”
NAHB chief economist Robert Dietz added: “The housing market appears to have passed peak mortgage rates for this cycle, and this should help to spur home buyer demand in the coming months, with the HMI component measuring future sales expectations up six points in December.”
Two of the three HMI component indexes rose for the month, and the third was flat. The index that gauges the traffic of prospective buyers rose three points, to 24; the index that measures sales expectations in the next six months also rose, by six points, to 45; and the index that charts current sales conditions was unchanged at 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 12.2% in November, to a seasonally adjusted annual rate of 590,000. The pace of new-home sales in November was the lowest annual rate since November 2022.
“New-home sales activity should improve in the months ahead as mortgage interest rates settle in below a 7% rate,” Huey, of the NAHB, stated. “Our latest builder survey turned positive in December, with builders indicating they expect a rise in future sales.”
“New-home sales were weaker in November as mortgage interest rates likely reached a cycle peak at 7.79%, per Freddie Mac, at the end of October,” Dietz, of the NAHB, added. “Mortgage rates have since moved lower, with Freddie Mac reporting a 30-year fixed rate of 6.67%” in mid-December.
The median new-home sale price in November was $434,700, up 4.8% from the previous month but down 5.9% from the same month a year earlier. Existing-home sales rose in November after five consecutive months of declines. The National Association of Realtors reported that sales climbed 0.8%, to a seasonally adjusted annual rate of 3.82 million.
“The latest weakness in existing home sales still reflects the buyer bidding process in most of October, when mortgage rates were at a two-decade high before the actual closings in November,” NAR chief economist Lawrence Yun stated in a press release. “A marked turn can be expected, as mortgage rates have plunged in recent weeks.”
The NAR reported that the median existing home price was $387,600 in November, up 4% from the same month a year earlier. “Home prices keep marching higher,” Yun added. “Only a dramatic rise in supply will dampen price appreciation.”
This article was originally published in the February 2024 issue.
