A key measure of U.S. consumer confidence fell in January even though the U.S. economy added 517,000 jobs, a number that far exceeded economists’ expectations. The Conference Board reported that its Consumer Confidence Index dropped to 107.1 from an upwardly revised 109.0 in December.
“Consumer confidence declined in January, but it remains above the level seen last July, lowest in 2022,” Ataman Ozyildirim, senior director, economics, at The Conference Board, stated in a press release. “Consumer confidence fell the most for households earning less than $15,000 and for households aged under 35.
“Consumers’ assessment of present economic and labor market conditions improved at the start of 2023,” Ozyildirim added. “However, the Expectations Index retreated in January reflecting their concerns about the economy over the next six months. Consumers were less upbeat about the short-term outlook for jobs. They also expect business conditions to worsen in the near term. Despite that, consumers expect their incomes to remain relatively stable in the months ahead. Meanwhile, purchasing plans for autos and appliances held steady, but fewer consumers are planning to buy a home — new or existing. Consumers’ expectations for inflation ticked up slightly from 6.6% to 6.8% over the next 12 months, but inflation expectations are still down from its peak of 7.9% last seen in June.”
A separate indicator of consumer sentiment rose in January. The University of Michigan reported that its Consumer Sentiment Index climbed to 64.9 from 59.7 in December.
“Consumer sentiment confirmed the preliminary January reading, remaining low from a historical perspective but continuing to lift for the second consecutive month, rising 9% above December and reaching about 3% below a year ago,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release.
“While the short-run economic outlook was relatively unchanged from last month, all other components of the index increased in January,” Hsu added. “The current conditions index soared 15% above December, with improving assessments of both personal finances and buying conditions for durables, supported by strong incomes and easing price pressures. That said, there are considerable downside risks to sentiment, with two-thirds of consumers expecting an economic downturn during the next year. Notably, the debt ceiling debate looms ahead and could reverse the gains seen over the last several months; past debt ceiling crises in 2011 and 2013 prompted steep
declines in consumer confidence.”
The U.S. Department of Labor reported that the unemployment rate was 3.4%. The leisure and hospitality sector added 128,000 jobs, employment in professional and business services rose by 82,000, and health care added 58,000 jobs.
“These numbers are a real surprise,” James Knightley, chief international economist for ING, told The Washington Post. “We had been looking at evidence of some softening in the labor market, but this blows that out of the water. The economy has created nearly 200,000 more jobs than anyone was forecasting.”
Daniel Vernazza, chief international economist at UniCredit Bank in London, told Reuters: “The labor market is still running hot — too hot for the Fed’s liking. Anyone that thought the Fed might stop hiking [interest rates] as soon as its March meeting is likely to be disappointed in this evidence.”
The federal government reported that average hourly earnings rose by 10 cents, to $33.03. During the 12-month period ending in January, earnings increased by 4.4%.
The U.S. Department of Commerce reported that consumer spending fell 0.2% in December after falling by a revised 0.1% in November. Original data had shown a 0.1% increase in spending in November.
“Hammered by higher prices and borrowing costs, and feeling less wealthy, U.S. households are cutting back and will likely contribute to a contraction in GDP in the first quarter,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, told Reuters. “The good news is that they are also pushing back against price hikes, which will help the Fed tackle inflation and limit further rate hikes.”
Inflation rose in December. The Personal Consumption Expenditures Price Index, excluding the volatile food and energy categories, rose 0.3%. The core PCE index rose 4.4% on a year-over-year basis in December. That was the smallest gain since October 2021. (The PCE is the Federal Reserve’s preferred inflation gauge.)
The Conference Board reported that its Leading Economic Index fell by 0.8% in December, to 110.7, after a similar decline in November.
The mood at the nation’s small businesses darkened in December. The National Federation of Independent Business reported that its Small Business Optimism Index dropped 2.1 points, to 89.8. That marked the 12th consecutive month that the index has been below the 49-year average of 98.
“Overall, small-business owners are not optimistic about 2023, as sales and business conditions are expected to deteriorate,” NFIB chief economist Bill Dunkelberg stated in a press release. “Owners are managing several economic uncertainties and persistent inflation, and they continue to make business and operational changes to compensate.”
Thirty-two percent of member business owners said inflation was their single most important problem in managing their business. Forty-one percent of owners said they had job openings that were hard to fill. That was down 3% from November, but the NFIB reported that the figure remains historically high.
A net 44% of owners, seasonally adjusted, reported raising pay in December. A net 27% said they planned to raise pay in the next three months.
Confidence among the nation’s home builders rose in January, ending 12 consecutive months of declines. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index climbed four points, to 35.
“It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales,” NAHB chairman Jerry Konter, a home builder and developer from Savannah, Ga., stated in a press release. “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”
NAHB chief economist Robert Dietz added: “While NAHB is forecasting a decline for single-family starts this year compared to 2022, it appears a turning point for housing lies ahead. In the coming quarters, single-family home building will rise off of cycle lows as mortgage rates are expected to trend lower and boost housing affordability. Improved housing affordability will increase housing demand, as the nation grapples with a structural housing deficit of 1.5 million units.”
All three HMI component indexes rose in January. The index that measures current sales conditions rose four points, to 40; the gauge that charts sales expectations in the next six months climbed by two points, to 37; and the component that measures the traffic of prospective buyers climbed by three points, to 23. 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 2.3% in December, to a seasonally adjusted annual rate of 616,000. “Builder incentives and declining mortgage rates during the month of December helped push new-home sales up for the month,” Konter stated. “However, because of higher construction costs and decreasing affordability, sales are down more than 25% compared to a year ago.”
The median new home sale price was $442,100 in December, down 3.7% from the previous month.
Existing-home sales fell for the 11th consecutive month in December. The National Association of Realtors reported that sales declined 1.5%, to a seasonally adjusted annual rate of 4.02 million.
“December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates,” NAR chief economist Lawrence Yun stated in a press release. “However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.”
The NAR reported that the median existing-home price was $366,900 in December, an increase of 2.3% from the same month a year earlier. The gain marks 130 consecutive months of year-over-year increases, which the NAR says is the longest-running streak on record.
This article was originally published in the March 2023 issue.
