The two top measures of consumer confidence suggested a steady, albeit unenthusiastic, mood in June amid signs that inflation may be resuming its decline and the job market may be slowing. The Conference Board reported that its Consumer Confidence Index declined slightly, to 100.4 in June, from a downwardly revised 101.3 in May.
“Confidence pulled back in June but remained within the same narrow range that’s held throughout the past two years, as strength in current labor market views continued to outweigh concerns about the future. However, if material weaknesses in the labor market appear, confidence could weaken as the year progresses,” Dana M. Peterson, chief economist at The Conference Board, stated in a press release.
“Consumers expressed mixed feelings: Their view of the present situation improved slightly overall, driven by an uptick in sentiment about the current labor market, but their assessment of current business conditions cooled,” Peterson added. “Meanwhile, for the second month in a row, consumers were a bit less pessimistic about future labor market conditions. However, their expectations for both future income and business conditions weakened, weighing down the overall Expectations Index.
“The decline in confidence between May and June was centered on consumers aged 35 to 54,” Peterson said. “By contrast, those under 35 and those 55 and older saw confidence improve. No clear pattern emerged in terms of income groups. On a six-month moving average basis, confidence continued to be highest among the youngest (under 35) and wealthiest (making over $100,000) consumers. Compared to May, consumers were less concerned about a forthcoming recession. However, consumers’ assessment of their family’s financial situation — both currently and over the next six months — was less positive.”
Meanwhile, the other major indicator of consumer sentiment was also only slightly lower in May. The University of Michigan reported that its Consumer Sentiment index fell to 68.2 from 69.1 in April.
“Consumer sentiment held steady in June; this month’s reading was a scant and statistically insignificant 0.9 index points below May and well within the margin of error,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “While consumers exhibited confidence that inflation will continue to moderate, many expressed concerns about the effect of high prices and weakening incomes on their personal finances.
“These trends offset the improvements in the short- and long-run outlook for business conditions stemming in part from expectations for softening interest rates,” Hsu added. “Still, sentiment is currently about 36% above the trough seen in June 2022.”
Ian Wyatt, director of economics at recreational marine lender Huntington Commercial Bank, had a cautious response to the monthly consumer sentiment readings. “Consumer confidence has become an increasingly political metric, with party affiliation and which party is in the White House closely tied to how people feel about the economy,” Wyatt told Soundings Trade Only. “While consumers are saying one thing, their behavior doesn’t always align with sentiment.”
Wyatt said his team was focused on what consumers were doing, and on data from the U.S. Bureau of Economic Analysis and credit cards. “In the spending data, we are seeing modest, solid growth, with the strongest growth in experiential categories like leisure,” he said, noting that boating industry is in that leisure category.
He added that consumers are “very into experiences right now. For example, [June 24] was the busiest air travel day in U.S. history, and seven of the 10 busiest days have occurred since May 23. Boating is already an amazing experience.”
The question, Wyatt said, is how the boating industry can better connect with consumers who may be hesitant to make large purchases, but who are actively spending on travel and leisure.
The U.S. Department of Commerce reported that consumer spending rose by just 0.2% in May, although it was up by 0.3% when adjusted for inflation. Personal income rose 0.5%; it had been up 0.3% the previous month.
Wyatt said consumers’ income gains bode well for the U.S. economy. Consumer spending accounts for as much as 70% of it. “Strong, real wage growth and an increase in the savings rate are very good signs for the outlook for consumer spending,” he said. “Hopefully this is the beginning of a trend.”
Inflation was flat in May as a key gauge showed its lowest annual rate since 2021. The Commerce Department reported that the Personal Consumption Expenditures Price Index was unchanged from the previous month. It had risen 0.3% in April.
In the 12-month period through May, the PCE index rose 2.6% after climbing 2.7% in April. The core PCE index, which strips out volatile food and energy prices, was up 0.1% in May, the smallest gain since November. It had been up by an upwardly revised 0.3% in April.
In addition, the core PCE index was up 2.6% on a year-over-year basis in May. That was the lowest increase since March 2021.
The year-over-year advance had been a higher 2.8% in April.
The PCE index is the Federal Reserve’s preferred inflation measure. The central bank is trying to get inflation down to 2% before cutting its benchmark interest rate. That rate remains in the range of 5.25% to 5.5%. Fed chairman Jerome Powell and other members of the central bank’s policy-making committee say they have been watching for a sustained decline in inflation toward their target. The committee is meeting in July, but most economists, Wyatt included, doubt that the Fed will act this month.
“A cut in July seems off the table and would be a big surprise,” Wyatt said. “Fed messaging is focused on sustained progress in the data toward target inflation. Recent benign inflation data across PCE, consumer and producer price indexes need to continue for the Fed to begin rate cuts.”
Wyatt also said he did not foresee a September cut: “The other key data point from BEA that came out [June 28] was strong, real income growth. The Fed is concerned that if it waits too long to cut, it will slow the labor market into close to recessionary territory. The robust wage growth we saw is not consistent with a much slower labor market and may give the room to delay the first cut.”
The Conference Board reported that its Leading Economic Index declined for the third month in a row in May, falling 0.5%, to 101.2, after a 0.6% decline in April. “The U.S. LEI fell again in May, driven primarily by a decline in new orders, weak consumer sentiment about future business conditions and lower building permits,” Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board, stated in a press release. “While the index’s six-month growth rate remained firmly negative, the LEI doesn’t currently signal a recession. We project real GDP growth will slow further to under 1% (annualized) over Q2 and Q3 2024, as elevated inflation and high interest rates continue to weigh on consumer spending.”
The mood at the nation’s small businesses improved in May to its best reading of the year, although it still remained below longtime norms. The National Federation of Independent Business reported that its Small Business Optimism Index rose 0.8 points, to 90.5, but that improvement left the index below its historical average of 98 for the 29th month in a row.
“The small business sector is responsible for the production of over 40% of GDP and employment, a crucial portion of the economy,” NFIB chief economist Bill Dunkelberg stated in a press release. “But for 29 consecutive months, small business owners have expressed historically low optimism, and their views about future business conditions are at the worst levels seen in 50 years. Small business owners need relief, as inflation has not eased much on Main Street.”
According to the NFIB, 22% of member business owners said inflation was their top business problem in May, the same as the previous month. Another 20% said labor quality was their biggest problem. Some 42% of owners, seasonally adjusted, reported job openings they could not fill. Also on a seasonally adjusted basis, a net 37% of owners said they raised pay in May.
Confidence among the nation’s home builders fell in June. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index declined by two points, to 43. It was the lowest reading since last December. “Persistently high mortgage rates are keeping many prospective buyers on the sidelines,” NAHB chairman Carl Harris, a custom home builder from Wichita, Kan., stated in a press release. “Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages and a dearth of buildable lots.”
NAHB chief economist Robert Dietz added: “We are in an unusual situation because a lack of progress on reducing shelter inflation, which is currently running at a 5.4% year-over-year rate, is making it difficult for the Federal Reserve to achieve its target inflation rate of 2%. The best way to bring down shelter inflation and push the overall inflation rate down to the 2% range is to increase the nation’s housing supply. A more favorable interest rate environment for construction and development loans would help to achieve this aim.”
All three HMI component indexes dropped in June and were below the level of 50. Numbers less than that indicate that more builders view conditions as poor rather than good. The index that charts current sales conditions fell three points, to 48; the index that measures sales expectations in the next six months dropped four points, to 47; and the index that charts the traffic of prospective buyers dipped two points, to 28.
The Commerce Department reported that sales of new homes fell 11.3% in May, to a seasonally adjusted annual rate of 619,000, from a sharply upwardly revised reading for April. The pace of new home sales in May was down 16.5% from the same month a year earlier and was the lowest since last November.
“Persistently high mortgage rates in May kept many prospective buyers on the sidelines,” Harris said. “However, significant unmet demand exists, and we expect mortgage rates to moderate in the coming months, which will bring more buyers into the market.”
Dietz added: “While new home inventory increased to a 9.3 months’ supply, due to a lack of resale homes for sale, the combined inventory for new and existing single-family homes remains lean at a 4.4 months’ supply, according to NAHB estimates.”
The median new home sale price in May was $417,400, down from $433,500 in April. The NAHB attributed the slippage to declines in new home size and some builders’ use of incentives.
The National Association of Realtors reported that existing-home sales also fell in May, dropping 0.7%, to a seasonally adjusted annual rate of 4.11 million.
“Eventually, more inventory will help boost home sales and tame home price gains in the upcoming months,” NAR chief economist Lawrence Yun stated in a press release. “Increased housing supply spells good news for consumers who want to see more properties before making purchasing decisions.”
The median existing-home price in May was $419,300, which the NAR said was a record high and represented a 5.8% increase from the same month a year earlier. All four regions of the country experienced price gains. “Home prices reaching new highs are creating a wider divide between those owning properties and those who wish to be first-time buyers,” Yun said. “The mortgage payment for a typical home today is more than double that of homes purchased before 2020. Still, first-time buyers in the market understand the long-term benefits of owning.”
The U.S. economy added a slightly greater than expected 206,000 jobs in June, but workers’ income gains cooled a bit in a report that had good news both for job seekers and the Federal Reserve. The job gains topped analysts’ estimates of 190,000 to 200,000, although the Labor Department sharply revised downward its May job total, from 272,000 to 218,000, and decreased its April number to 108,000 from an originally reported 165,000, denoting a less robust economy in those months than policymakers had believed.
The unemployment rate edged upward from 4% in May to 4.1%. in June as more people joined in the search for jobs, marking the first month that the rate has been above 4% since November 2021. “The labor market is still strong but not quite as strong as it was a year ago,” Gus Faucher, chief economist at PNC, told The
Washington Post. “If we see a bit slower job growth, a little bit of cooling competition for workers, slightly less wage growth, that should help get inflation back to the Fed’s 2% target.”
In a sign that pay increases are moderating, the government said that workers’ average hourly earnings rose by 10 cents, or 0.3%, in June, to $35, down from 0.4% the previous month. During the past 12 months earnings have increased by 3.9%, down from 4.1% in May, but even with the decline they remain above the rate of inflation.
“The job market is bending without yet breaking, which boosts the argument for rate cuts,” David Russell, global head of market strategy at TradeStation, told CNBC. “Things are not too hot and not too cold. Goldilocks is here, and September is in play.”
The government said that the labor force participation rate — the measure of the population that is in the workforce — ticked up slightly, to 62.6% from 62.5% the previous month. The government sector topped all job categories in June with a gain of 70,000; health care, which has been a jobs leader for the past year, added 49,000; social assistance employment added 34,000 jobs; and construction added 27,000 jobs.
Ahead of the July jobs report, the Labor Department said that job openings nationally increased in May, which suggests that labor demand remains on a healthy path. The number of available positions climbed to 8.14 million from a downwardly revised 7.92 million the previous month, the department’s Bureau of Labor Statistics said in its Job Openings and Labor Turnover Survey.
Manufacturing, government and health care were the industry leaders for job openings. Hirings — and layoffs — increased across the economy, and the number of openings per unemployed worker was 1.2, the same as the previous month. That figure is the lowest since June 2021.
The ADP Research Institute said in its National Employment Report for June that private sector employment rose by 150,000 during the month, which was down from an upwardly revised 157,000 the previous month, and annual pay was up 4.9% year-over-year. “Job growth has been solid but not broad-based,” Nela Richardson, chief economist at ADP, said in a statement accompanying the report. “Had it not been for a rebound in hiring in leisure and hospitality, June would have been a downbeat month.”
The Commerce Department said that consumer spending rose just 0.2% in May, although it was up 0.3% when adjusted for inflation. Personal income rose 0.5%; it had been up 0.3% the previous month.
This article was originally published in the August 2024 issue.
