The country’s two main gauges of the consumer’s mood provided mixed results in May. Respondents to the survey conducted by The Conference Board were more optimistic about their ability to find a job, but people interviewed by the University of Michigan were pessimistic.
The Conference Board reported that its Consumer Confidence Index rose to 102 from a slightly upwardly revised 97.5 in April. “Confidence improved in May after three consecutive months of decline,” Dana M. Peterson, chief economist at The Conference Board, stated in a press release. “Consumers’ assessment of current business conditions was slightly less positive than last month. However, the strong labor market continued to bolster consumers’ overall assessment of the present situation.”
“Views of current labor market conditions improved in May, as fewer respondents said jobs were ‘hard to get,’ which outweighed a slight decline in the number who said jobs were ‘plentiful,’” Peterson added.
Peterson continued: “Compared to last month, confidence improved among consumers of all age groups. In terms of income, those making over $100,000 expressed the largest rise in confidence. On a six-month moving average basis, confidence continued to be highest among the youngest (under 35) and wealthiest (making over $100,000) consumers. According to May’s write-in responses, consumers cited prices, especially for food and groceries, as having the greatest impact on their view of the U.S. economy. Notably, average 12-month inflation expectations ticked up from 5.3% to 5.4%. Perhaps as a consequence, the share of consumers expecting higher interest rates over the year ahead also rose, from 55.2% to 56.2%.”
Meanwhile, the other major indicator of consumer sentiment dropped to a six-month low. The University of Michigan reported that its Consumer Sentiment Index fell to 69.1 from 77.2 in April as those it surveyed had a broadly different take on the economy.
Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release that although consumers’ opinions about their personal finances changed little in May, their expectations for short-term business conditions were markedly less optimistic: “Consumers expressed particular concern over labor markets. They expect unemployment rates to rise and income growth to slow. The prospect of continued high interest rates also weighed down consumer views. These deteriorating expectations suggest that multiple factors pose downside risk for consumer spending.
Despite the decline, the university reported that the sentiment index was 20% higher than a year ago and was 40% above its historic low in June 2022. Consumers in a variety of surveys have for months reported that they are confident about their personal finances, but believe the overall economy is in bad shape.
The Federal Reserve reported in its annual survey of household economic well-being — which it conducted last October but only released in May — that 72% of Americans said they were doing at least OK financially, but only 22% of the respondents rated the national economy as good or excellent.
Financial analysts have pointed to stubbornly high inflation as the main reason for what some have termed a “vibecession” among the general public.
“Our data shows mixed results around the consumer and retail demand for boats, specifically in sales relative to value products, which could imply early slowing in spending broadly,” Chad Lyon, managing director, Wells Fargo Inventory Finance, told Soundings Trade Only. “As we look deeper, there is continued spending on categories that are considered premium, larger units, as the high-end consumer appears healthy. Looking at it overall, it appears retail sales are down mid-single digits year to date.”
Matt Gruhn, president of the Marine Retailers Association of the Americas, told Soundings Trade Only: “What we tend to see in periods of slower economic activity is that the boat dealers who win in their respective marketplaces are progressive in trying new strategies and tactics and aggressive in pursuing leads and closing business.
“Results this far into the year have been mixed, with some dealers suggesting it has been tough to generate sales, while others have suggested the year has gone well for them,” Gruhn added. “We see clearly that the dealers that have been successful are the ones who take the economy in stride and have recalibrated their approach to running their business, reinstituting the fundamentals of generating, nurturing and closing leads, and have innovated their way to finding success.”
Gruhn also said boat dealers watch a lot of economic indicators. “The real driver of the slowdown in boat sales at the moment is the compounding effect of the inflation we’ve experienced, along with the much higher interest rates,” he said. “Boats, in general, cost more than they have in recent years, and today’s costs to purchase boats on loans makes it more challenging.”
Lyon said many economic metrics were relevant to the recreational marine industry, but no specific one closely correlated to retail demand for boats. “However, one area that has always been a good economic signal for boating is housing demand because, like boats, they are influenced by long-term interest rates that dictate borrowing costs,” he said. “Today we are seeing higher rates on boat loans and mortgages being a headwind to growth. Additionally, home purchases are influenced by a longer-term view on the economy, which again is relevant to demand for boats.”
“Ironically, there is a headwind for both segments that many current owners of boats and homes are experiencing from those purchases a few years ago when rates were at record lows, making it costly to trade out of their current position,” Lyon added. “On a positive front, employment, wage growth and the stock market performance all continue with positive trends and have historically been good for boat sales.”
The U.S. Department of Commerce reported that consumer spending rose just 0.2% in April after a downwardly revised 0.7% increase in March. Adjusted for inflation, spending actually fell 0.1% in April. Personal income rose 0.3%; it had risen by 0.5% in March.
Consumer spending accounts for as much as 70% of U.S. economic activity.
“We are in a be-careful-what-you-wish-for moment,” Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, told Reuters in regard to the consumer spending decline and whether it could help to reduce inflation. If the Federal Reserve is able to cut interest rates slowly, he said, “then that will be good for markets. However, if consumer spending — and the economy — slows too quickly, then corporate profits and stock prices will go down much more quickly than the Fed will be able to cut rates.”
Inflation was flat in April. The Commerce Department reported that the Personal Consumption Expenditures Price Index rose 0.3%, matching the March rate. In the 12-month period through April, the index rose 2.7%, also climbing at the same rate as it did year-over-year the previous month. The core PCE index, which strips out volatile food and energy prices, rose 0.2%. That was the smallest increase this year for the core gauge. It rose 2.8% year over year.
“The core index came in at 2.8%. That’s fine, but it’s been trading in a range for five months now, and that’s pretty sticky to me,” Dan North, senior economist for North America at Allianz Trade, told CNBC. “I’m not reaching for the Pepto yet, but I’m not feeling great. This is not what you want to see.”
The Conference Board reported that its Leading Economic Index declined again in April, falling 0.6%, to 101.8, after decreasing by 0.3% in March and increasing by 0.2% in February.
“Another decline in the U.S. LEI confirms that softer economic conditions lay ahead,” Justyna Zabinska-La Monica, senior manager, business cycle Indicators, at The Conference Board, stated in a press release. “Deterioration in consumers’ outlook on business conditions, weaker new orders, a negative yield spread and a drop in new building permits fueled April’s decline.”
“While the LEI’s six-month and annual growth rates no longer signal a forthcoming recession, they still point to serious headwinds to growth ahead,” Zabinska-La Monica added. “Indeed, elevated inflation, high interest rates, rising household debt and depleted pandemic savings are all expected to continue weighing on the U.S. economy in 2024. As a result, we project that real GDP growth will slow to under 1% over the Q2 to Q3 2024 period.”
The mood at the nation’s small businesses brightened a bit in April. The National Federation of Independent Business reported that its Small Business Optimism Index rose by 1.2 points, to 89.7, but remained below the 50-year average of 98 for the 28th month in a row.
“Cost pressures remain the top issue for small business owners, including historically high levels of owners raising compensation to keep and attract employees,” Bill Dunkelberg, the NFIB’s chief economist, stated in a press release. “Overall, small business owners remain historically very pessimistic as they continue to navigate these challenges. Owners are dealing with a rising level of uncertainty but will continue to do what they do best — serve their customers.”
Twenty-two percent of member owners said inflation was their single most important business problem in April. That figure was down 3% from March, but still topped the list.
“For more than a decade now, if not longer, our labor market and the lack of qualified skilled workers, in particular, has been a drag on our industry,” Gruhn said. “I heard a dealer say recently that there’s not a dealer out there who wouldn’t jump at the chance to hire a good technician. While the demand for good employees does not seem to subside, the workforce challenges we face specific to the lack of skilled workers is a critical issue for our industry to address.”
Lyon says the marine industry “provides an exciting, fun work experience and that historically has attracted and retained workers.
As for the current labor market, we do see some loosening as non-farm payrolls continue to increase. However, that is at a slower rate. In addition, people changing jobs and total job openings are trending lower, which is good to see.”
Confidence among the nation’s home builders declined in May for the first time since last November. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index declined by six points, to 45.
“The market has slowed down since mortgage rates increased, and this has pushed many potential buyers back to the sidelines,” NAHB chairman Carl Harris, a custom home builder from Wichita, Kan., stated in a press release. “We are also concerned about the recent codes rules that require HUD and USDA to insure mortgages for new single-family homes only if they are built to the 2021 International Energy Conservation Code.”
NAHB chief economist Robert Dietz added: “A lack of progress on reducing inflation pushed long-term interest rates higher in the first quarter, and this is acting as a drag on builder sentiment. The last leg in the inflation fight is to reduce shelter inflation, and this can only occur if builders are able to construct more attainable, affordable housing.”
All three HMI component indexes were lower in May. The index that charts current sales conditions fell six points, to 51; the component that measures sales expectations in the next six months fell nine points, to 51; and the gauge that charts the traffic of prospective buyers declined by four points, to 30. 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 4.7% in April, to a seasonally adjusted annual rate of 634,000, from a downwardly revised reading in March. The pace of sales in April was down 7.7% from the same month a year earlier.
“The last four weeks, mortgage rates have been above 7%, and this is clearly causing many potential home buyers to sit on the fence,” Harris said. “However, in the weeks and months ahead, we expect mortgage rates to fall below 7%.
Danushka Nanayakkara-Skillington, the NAHB’s assistant vice president for forecasting and analysis, added: “A lack of homes in the resale market, combined with softening of the median new home price, should incentivize home buyers to turn to new construction in the coming months.”
The median new home sale price was in April was $433,500, which was down 1.4% from March but up 3.9% from the same month a year earlier. The National Association of Realtors reported that existing-home sales also declined in April, dropping 1.9% to a seasonally adjusted annual rate of 4.14 million.
The median existing-home price was $407,600 in April, an increase of 5.7% from the same month a year earlier. It was the 10th month in a row of year-over-year price gains.
“Home prices reaching a record high for the month of April is very good news for homeowners,” Yun added. “However, the pace of price increases should taper off since more housing inventory is becoming available.”
The U.S. economy added a stunning 272,000 jobs in May, far exceeding economists’ expectations, and wage gains also topped estimates, strongly diminishing the chances for an interest-rate cut from the Federal Reserve anytime soon.
Experts had predicted that the economy would add anywhere from 180,000 to 190,000 jobs last month. Instead, the Labor Department said in a statement that job growth increased at a pace that was 40,000 higher than the average for the previous 12 months.
Despite the strong increase in jobs, the unemployment rate rose slightly, from 3.9% in April to 4% in May, possibly because more people were encouraged by what they see in the job market and were out looking for work. Nonetheless, the rate was the highest since January 2022.
Lyon told Soundings Trade Only that the jobs report shows continued strength in the economy, but also the challenges of inflation.
“Traditionally, when prices are stable, a strong jobs report with healthy wage growth would be good for the recreational marine industry,” Lyon said. “However, with elevated inflation means higher interest rates, both long-term rates that affect retail financing and short-term rates that affect floorplan rates, but we still expect [boat] sales will likely remain around their current levels.”
Gruhn took note of the fact that 2024 is a presidential election year.
“I believe, with it being an election year and there being some general discomfort with interest rates and prices and so forth, that there’s a general discontent with how people feel about the economy and the uncertainty that persists around it,” he told Soundings Trade Only.
“But I think the real measurables such as jobs suggest that there hasn’t been a negative trigger to lead business leaders to cut back on their staffing.”
Ian Wyatt, director of economics at recreational marine lender Huntington Commercial Bank, told Soundings Trade Only that the jobs report was “very solid” with good news in the details, as well as the headline number.
“Average hourly earnings are up 4.1% over the past year, outpacing inflation,” he said. “People are actively looking for work: the percent of prime working age (25–54-year-olds) who have a job or are looking for one hit the highest level in 20 years.
“Employment rose in transportation and warehousing — a segment very much hurt by the pullback in goods spending that impacted the boating industry. A number of spending categories that went through a sugar high just after COVID-19, followed by a crash, seem to be stabilizing. For example, recent RV sales and shipment data has recently improved.”
“While we saw solid job growth in the payroll data, the unemployment rate, which comes from the household survey, ticked up a tenth, to 4.0 percent. The rise in the unemployment rate was largely due to people re-entering the labor force, not due to job losses, so even this increase can be viewed in a positive light. Overall, the household survey over the last several months has shown a less rosy picture than the payroll survey.”
Wyatt said consumers are very much focused on experiences right now.
“In boating and other areas, we’ve seen a mix of behaviors. Higher-net -worth households have balance sheets and stock portfolios that are in great shape, which is fueling their spending. For more middle-class consumers, we are seeing the combination of sticker shock and higher rates causing some consumers to postpone purchases of products like boats, while others are still buying but trading down.”
Wyatt said the interest-rate outlook this year is setting up a lot like 2023.
“In 2023, job growth and inflation outpaced forecasts, so the Fed raised rates higher than it expected,” he said. “By late 2023, some softness in the labor market and other stresses caused by rate hikes caused the ‘Fed Pivot,’ where they started discussing cuts. Right now, we have a data-dependent Fed and, as in 2023, job growth and inflation this year are stronger than expected, which is causing the Fed to push back the date of the first cut.”
“If we see a little more softness in the data, yes, the Fed will cut. But right now this jobs report and recent inflation data are causing the Fed to wait longer until they see a stronger sign in the data that inflation cooled a little more or the labor market is softer.”
The Labor Department said in the jobs report that average hourly earnings rose by 14 cents, or 0.4%, to $34.91, in May, topping forecasts of an 0.3% increase. During the past 12 months earnings have increased by 4.1%, exceeding the rate of inflation.
The government revised its jobs totals downward for each of the previous two months. The figure for March fell by 5,000 to 310,000, and the total for April declined by 10,000 to 165,000.
The labor force participation rate — the measure of the population that is in the workforce — declined slightly, to 62.5% in May from 62.7 percent in April.
The government said the health care sector topped all categories with a gain of 68,000 jobs in May. It has been a jobs leader for the past year.
A total of 43,000 jobs were added in government employment; hospitality and leisure employment added 42,000; professional, scientific and technical services added 32,000; social assistance employment added 15,000; and retail employment added 13,000.
In addition, job openings fell in April to their lowest level in more than three years, another government report said. The Labor Department said Tuesday in its Job Openings and Labor Turnover Survey that available jobs fell to 8.06 million from a downwardly revised 8.36 million the previous month.
The cooling the labor market showed was because of reduced hiring rather than layoffs, an encouraging sign for the Federal Reserve. The ratio of job openings to unemployed persons declined to 1.2 in April, and that was the lowest it has been since June of 2021. The Fed closely watches that figure.
Further signs of a slowdown in hiring came on Wednesday when the ADP Research Institute said private payrolls rose by just 152,000 in May. That was the slowest pace since the start of the year.
This article was originally published in the July 2024 issue.
