A key indicator of U.S. consumer confidence declined in October as the public remained pessimistic about the economy’s prospects, despite other data showing that consumers have been spending freely and significantly in recent months. The Conference Board reported that its Consumer Confidence Index dropped to 102.6 from an upwardly revised 104.3 in September.
“Consumer confidence fell again in October 2023, marking three consecutive months of decline,” Dana Peterson, chief economist at The Conference Board, stated in a press release. “October’s retreat reflected pullbacks in both the Present Situation and Expectations Index. Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular. Consumers also expressed concerns about the political situation and higher interest rates. Worries around war/conflicts also rose, amid the recent turmoil in the Middle East. The decline in consumer confidence was evident across householders aged 35 and up, and not limited to any one income group.
“Expectations for the next six months stayed below the recession threshold of 80, reflecting a decline in confidence about future business conditions, job availability and incomes,” Peterson added. “The continued skepticism about the future is notable, given U.S. consumers — at least through the third quarter of this year — continued to spend heavily on both goods and services. Expectations that interest rates will rise in the year ahead ticked up in October, and the outlook for stock prices weakened slightly.”
A separate indicator of consumer sentiment was also lower in October. The University of Michigan reported that its Consumer Sentiment Index fell to 63.8 from 67.9 in September. “Consumer sentiment confirmed its early month reading, falling back about 6% this October following two consecutive months of very little change,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “This decline was driven in large part by higher-income consumers and those with sizable stock holdings, consistent with recent weakness in equity markets.
“Across all consumers, one-year expected business conditions plunged 16% and expectations over consumers’ own personal finances in the year ahead fell 8%, reflecting ongoing concerns about inflation and, to a lesser degree, uncertainty over the implications of negative news both domestically and abroad,” Hsu added.
The declines in confidence occurred despite the fact that the economy grew in the third quarter at a much faster pace than economists expected. The U.S. Department of Commerce reported that the nation’s gross domestic product increased at a rate of 4.9% during the period.
“It’s enough to knock me over with a feather,” Diane Swonk, chief economist at KPMG, told The Washington Post. “We’ve had the most aggressive credit tightening from the Federal Reserve since the 1980s, and guess what, the economy’s accelerating. We really underestimated how much consumers could keep spending.”
The Commerce Department also reported that consumer spending, which represents more than two-thirds of economic activity, rose by a solid 0.7% in September. Adjusted for inflation, spending was still up 0.4%.
Personal income rose 0.3% in September after a gain of 0.4% in August. “U.S. households are healthy financially, relative to past cycles,” Chris Low, chief economist at FHN Financial in New York, told Reuters. “Debt levels are low, savings are still pretty high, and income is solid. There is nothing compelling in the data suggesting a spending slowdown is inevitable.”
Inflation continued to rise at a moderate pace in September. The Personal Consumption Expenditures Price Index rose 0.4%, which was the same rate of increase that it showed in August. The core PCE, which strips out volatile food and energy prices, was up 0.3% after a 0.1% rise in August. For the 12-month period that ended in September, the core PCE index rose 3.7%, which was the smallest gain since May 2021. The PCE index is the Federal Reserve’s preferred inflation gauge.
The Conference Board reported that its Leading Economic Index declined by 0.7% in September, to 104.6, after a decline of 0.5% in August. “The LEI for the U.S. fell again in September, marking a year and a half of consecutive monthly declines since April 2022,” Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board, stated in a press release. “In September, negative or flat contributions from nine of the index’s 10 components more than offset fewer initial claims for unemployment insurance. Although the six-month growth rate in the LEI is somewhat less negative, and the recession signal did not sound, it still signals risk of economic weakness ahead.
“So far, the U.S. economy has shown considerable resilience despite pressures from rising interest rates and high inflation,” Zabinska-La Monica added. “Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”
The mood at the nation’s small businesses darkened slightly in September. The National Federation of Independent Business reported that its Small Business Optimism Index fell by half a point, to 90.8. The result marked the 21st consecutive month that the index has been below its 49-year average of 98.
“Owners remain pessimistic about future business conditions, which has contributed to the low optimism they have regarding the economy,” Bill Dunkelberg, the NFIB’s chief economist, stated in a press release. “Sales growth among small businesses has slowed, and the bottom line is being squeezed, leaving owners few options beyond raising selling prices for financial relief.”
Twenty-three percent of business owners said inflation was their most important business problem, a percentage unchanged from August. Forty-three percent of owners, seasonally adjusted, reported job openings that were hard to fill, up 3% from August and a rate that the NFIB called historically high. A net 36%, seasonally adjusted, reported raising compensation in September.
Confidence among the nation’s home builders declined in October. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index fell four points, to 40, from a downwardly revised September reading. It was the third consecutive monthly drop in confidence, and sentiment levels have now declined to their lowest point since January.
“Builders have reported lower levels of buyer traffic as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala., stated in a press release. “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”
NAHB chief economist Robert Dietz added: “The housing affordability crisis can only be solved by adding additional attainable, affordable supply. Boosting housing production would help reduce the shelter inflation component that was responsible for more than half of the overall Consumer Price Index increase in September, and aid the Fed’s mission to bring inflation back down to 2%. However, uncertainty regarding monetary policy is contributing to affordability challenges in the market.”
All three major HMI component indexes declined in October. The index gauging current sales conditions fell four points, to 46; the component that charts sales expectations in the next six months dropped five points, to 44; and the gauge that measures the traffic of prospective buyers slipped by four points, to 26. Any number above 50 indicates that more builders view conditions as good rather than poor.
Nonetheless, the Commerce Department reported that sales of new homes rose sharply in September. The government said sales climbed by 12.3%, to a seasonally adjusted annual rate of 759,000. The pace of sales was up 33.9% from the same month a year earlier.
“While more buyers are turning to new construction because of a lack of existing inventory, higher mortgage rates that are approaching 8% are expected to slow the market in the coming months as affordability conditions continue to worsen,” Huey said. “Higher interest rates not only raise the cost of housing for buyers but for builders as well because of increased costs for financing construction loans.”
Danushka Nanayakkara-Skillington, the NAHB’s assistant vice president for forecasting and analysis, added: “New-home sales surged in September largely due to the low existing home inventory rate, as many homeowners with attractive mortgage rates are electing to stay put rather than purchase a move-up home with a much higher interest rate. To compensate for this high-interest-rate environment, more builders are building smaller homes, which has resulted in a decline in the median new-home price.”
The median sales price for a new home in September was $418,800, which was down 3.3% from August and 12.3% from the same month a year earlier. Existing-home sales declined in September. The National Association of Realtors reported that sales fell 2%, to a seasonally adjusted annual rate of 3.96 million.
“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” NAR chief economist Lawrence Yun stated in a press release. “The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.”
The NAR reported that the median existing-home price was $394,300, up 2.8% from the same month a year earlier.
This article was originally published in the December 2023 issue.
