Recession Fears Persist

A key measure of U.S. consumer confidence dropped in April to a nine-month low as the outlook for the job market worsened and expectations for inflation remained pessimistic.

By Jack Atzinger

May 17, 2023

A key measure of U.S. consumer confidence dropped in April to a nine-month low as the outlook for the job market worsened and expectations for inflation remained pessimistic.

The Conference Board reported that its Consumer Confidence Index declined to 101.3 from 104.0 in March.

“While consumers’ relatively favorable assessment of the current business environment improved somewhat in April, their expectations fell and remain below the level which often signals a recession looming in the short term,” Ataman Ozyildirim, senior director, economics, at The Conference Board, stated in a press release. “Consumers became more pessimistic about the outlook for both business conditions and labor markets. Compared to [March], fewer households expect business conditions to improve, and more expect worsening of conditions in the next six months. They also expect fewer jobs to be available over the short term. April’s decline in consumer confidence reflects particular deterioration in expectations for consumers under 55 years of age and for households earning $50,000 and over.

“Meanwhile, April’s results show consumer inflation expectations over the next 12 months remain essentially unchanged from March at 6.2% — although that level is down substantially from the peak of 7.9% reached last year, it is still elevated,” Ozyildirim added. “Overall purchasing plans for homes, autos, appliances and vacations all pulled back in April, a signal that consumers may be economizing amid growing pessimism.”

Meanwhile, a separate indicator of consumer sentiment rose slightly in April. The University of Michigan reported that its Consumer Sentiment Index climbed to 63.5 from 62 in March.

“Consumer sentiment was little changed this month, inching up less than two index points from March,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “Buying conditions for durables improved 11%, primarily on the basis of easing perceptions of unaffordability. Despite the increasingly negative news on business conditions heard by consumers, their short- and long-run economic outlook improved modestly from last month. These improvements were balanced by worsening assessments of personal finances due to higher expenses, reflecting the ongoing pain stemming from continued high prices.”

The U.S. Department of Commerce reported that consumer spending was unchanged in March after a downwardly revised 0.1% gain in February. Personal income rose 0.3% in March.

“The Fed is in a tough spot,” Bill Adams, chief economist at Comerica Bank in Dallas, told Reuters. “The economy is cooling, but inflation is still too high. The components of inflation that the Fed worries will be most persistent, labor-intensive services, are especially sticky.”

Inflation rose in March. The Personal Consumption Expenditures Price Index, excluding the volatile food and energy categories, rose 0.3%, the same as it did in February. The so-called core PCE price index was up 4.6% on a year-over-year basis in March.The PCE index is the Federal Reserve’s preferred inflation gauge.

The Conference Board reported that its Leading Economic Index fell 1.2% in March, to 108.4, after a decline of 0.5% in February.

“The U.S. LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board, stated in a press release.

“The weaknesses among the index’s components were widespread in March and have been so over the past six months, which pushed the growth rate of the LEI deeper into negative territory,” Zabinska-La Monica added. “Only stock prices and manufacturers’ new orders for consumer goods and materials contributed positively over the last six months. The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the U.S. economy over the coming months, leading to a recession starting in mid-2023.”

The mood at the nation’s small businesses darkened slightly in March. The National Federation of Independent Business reported that its Small Business Optimism Index fell 0.8 points, to 90.1. It marked the 15th consecutive month that the index fell below the 49-year average of 98.

“Small-business owners are cynical about future economic conditions,” NFIB chief economist Bill Dunkelberg stated in a press release. “Hiring plans fell to their lowest level since May 2020, but strong consumer spending has kept Main Street alive and supported strong labor demand.”

Twenty-four percent of member business owners said inflation was the single most important problem they have in operating their business. Forty-three percent of owners reported having job openings that were hard to fill, a figure that the federation says remains historically high. A net 42% of owners, seasonally adjusted, reported raising pay in March.

Confidence among the nation’s home builders rose slightly in April. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index rose one point, to 45.

“For the fourth straight month, builder confidence has increased due to a lack of resale inventory despite elevated interest rates,” NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala., stated in a press release. “Builders note that additional declines in mortgage rates, to below 6%, will price in further demand for housing. Nonetheless, the industry continues to be plagued by building material issues, including lack of access to electrical transformer equipment.”

NAHB chief economist Robert Dietz added: “Currently, one-third of housing inventory is new construction, compared to historical norms of a little more than 10%. More buyers looking at new homes, along with the use of sales incentives, have supported new-home sales since the start of 2023. And while [acquisition, development and construction] loan conditions are tight, there is not significant evidence thus far that pressure on the regional bank system has made this lending environment for builders and land developers worse.”

The HMI component index that measures current sales conditions rose two points in April, to 51; the index that charts sales expectations in the next six months rose three points, to 50; and the gauge that measures the traffic of prospective buyers was unchanged at 31.

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 9.6% in March, to a seasonally adjusted annual rate of 683,000.

“A lack of resale inventory, combined with many builders offering price incentives, helped to push new-home sales higher in March,” Huey, of the NAHB, stated in a press release. “However, sales are down 3.4% compared to a year ago because of the shortage of electrical transformer equipment and building material price volatility.”

Danushka Nanayakkara-Skillington, the NAHB’s assistant vice president for forecasting and analysis, added: “The average Freddie Mac mortgage rate gradually fell from near 6.7% at the beginning of March to 6.3% at the end of the month, and this helped to push new home sales higher in March.”

The median sales price was $449,800 in March, up 3.2% from the same month a year earlier.

Existing-home sales declined in March. The National Association of Realtors reported that sales fell 2.4%, to a seasonally adjusted annual rate of 4.44 million.

“Home sales are trying to recover and are highly sensitive to changes in mortgage rates,” NAR chief economist Lawrence Yun stated in a press release. “Yet at the same time, multiple offers on starter homes are quite common, implying more supply is needed to fully satisfy demand. It’s a unique housing market.”

The NAR reported that the median existing-home price was $375,700 in March, a decline of 0.9% from the same month a year earlier. That marked the second consecutive month of declines after a streak of 131 months of consecutive year-over-year increases.

“Home prices continue to rise in regions where jobs are being added and housing is relatively affordable,” Yun added. “However, the more expensive areas of the country are adjusting to lower prices.”

This article was originally published in the June 2023 issue.