Interest rates, prices and the economy contributed to the largest monthly decline since August 2021
Both of the country’s primary measurements of consumer sentiment closed sharply lower in February, reflecting Americans’ pessimism about the coming trend in interest rates and consumer prices, and the general economy. The Conference Board said its Consumer Confidence Index declined by 7 points, to 98.3, from an upwardly revised 105.3 in January.
“In February, consumer confidence registered the largest monthly decline since August 2021,” Stephanie Guichard, senior economist, global indicators, at The Conference Board, stated in a press release. “This is the third consecutive month-on-month decline, bringing the index to the bottom of the range that has prevailed since 2022.
“Of the five components of the index, only consumers’ assessment of present business conditions improved, albeit slightly,” Guichard added. “Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a 10-month high.”
The think tank said February’s decline showed up among all age groups but was most pronounced for consumers between 35 and 55. Among income groups, only households that earned less than $15,000 a year and those that earn between $100,000 and $125,000 did not reflect the predominant opinion.
“Average 12-month inflation expectations surged from 5.2% to 6% in February,” Guichard said. “This increase likely reflected a mix of factors, including sticky inflation but also the recent jump in prices of key household staples like eggs and the expected impact of tariffs. References to inflation and prices in general continue to rank high in write-in responses, but the focus shifted toward other topics. There was a sharp increase in the mentions of trade and tariffs, back to a level unseen since 2019. Most notably, comments on the current administration and its policies dominated the responses.”
The Conference Board said the proportion of consumers who anticipate a recession during the next 12 months increased to a nine-month high. The outlook was no better within the University of Michigan’s Consumer Sentiment Index. Like its counterpart, the index fell by 7 points, to 64.7, from 71.7 in January.
“Consumer sentiment extended its early-month decline, sliding nearly 10% from January,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “The decrease was unanimous across groups by age, income and wealth. All five index components deteriorated [in February], led by a 19% plunge in buying conditions for durables, in large part due to fears that tariff-induced price increases are imminent.
“Expectations for personal finances and the short-run economic outlook both declined almost 10% in February, while the long-run economic outlook fell back about 6% to its lowest reading since November 2023,” Hsu added. “While sentiment fell for both Democrats and independents, it was unchanged for Republicans, reflecting continued disagreements on the consequences of new economic policies.
“Year-ahead inflation expectations jumped up from 3.3% [in January] to 4.3% [in February],” she said, “the highest reading since November 2023 and marking two consecutive months of unusually large increases. The current reading is now well above the 2.3 to 3% range seen in the two years prior to the pandemic.”
The Commerce Department said consumer spending fell in January — for the first time in nearly two years — dropping by 0.2%. Although it came in the month following the traditionally heavy-spending holiday season, when consumers might have been expected to take a bit of a breather, the decline was nonetheless the first since March 2023 and was the largest decrease in nearly four years.
It came after December’s upwardly revised gain of 0.8%. Adjusted for inflation, consumer spending fell in January by 0.5%. Personal income, however, rose by a sharp 0.9% in January.
Inflation results were mixed in January. The Commerce Department said the Personal Consumption Expenditures Price Index rose by 0.3%, matching the gain for the previous month. During the 12-month period through January, the index rose by 2.5% after increasing by 2.6% the previous month. The core PCE index, which strips out the volatile food and energy sectors, also rose by 0.3% in January after a 0.2% increase in December. In the 12-month period through January, core inflation was up by 2.6% after an increase of 2.9% the previous month.
The Federal Reserve, by keeping its benchmark interest rate relatively high, is trying to coax inflation down to 2%. “Tariffs are the most obvious threat to the pricing environment, and the last few tenths to the Fed’s 2% target remain in the crosshairs,” Shannon Grein, an economist at Wells Fargo, told Reuters.
The Conference Board said its Leading Economic Index fell by 0.3% in January, to 101.5, after an upwardly revised 0.1% increase in December that reversed an initially reported decline of 0.1 percent. “The U.S. LEI declined in January, reversing most of the gains from the previous two months,” Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board, stated in a press release. “Consumers’ assessments of future business conditions turned more pessimistic in January, which — alongside fewer weekly hours worked in manufacturing — drove the monthly decline.
“However, manufacturing orders have almost stabilized after weighing heavily on the index since 2022, and the yield spread contributed positively for the first time since November 2022,” Zabinska-La Monica added. “Overall, just four of the LEI’s 10 components were negative in January. In addition, the LEI’s six-month and annual growth rates continued to trend upward, signaling milder obstacles to U.S. economic activity ahead. We currently forecast that real GDP for the U.S. will expand by 2.3% in 2025, with stronger growth in the first half of the year.”
The Commerce Department said in late February that the economy grew by precisely that amount in the fourth quarter last year and that the economy grew by 2.8% for the full year.
The mood at the nation’s small businesses darkened in January after brightening significantly in November and December, after Donald Trump’s election to the presidency for a second non-consecutive term. The National Federation of Independent Business said its Small Business Optimism Index dropped by 2.3 points, to 102.8, though it remained above its 51-year average of 98 for the third consecutive month. However, the NFIB’s Uncertainty Index rose by 14 points, to 100, which was the third-highest recorded reading in its history.
“Overall, small business owners remain optimistic regarding future business conditions, but uncertainty is on the rise,” NFIB chief economist Bill Dunkelberg stated in a press release. “Hiring challenges continue to frustrate Main Street owners as they struggle to find qualified workers to fill their many open positions. Meanwhile, fewer plan capital investments as they prepare for the months ahead.”
NFIB said the net percentage of member business owners who expect the economy to improve in the coming months fell by 5 points, to 47%, seasonally adjusted. Eighteen percent of owners said inflation is their single most important business problem. That was down 2 points from December and matched the percentage in the new survey who said labor quality is the top issue.
A seasonally adjusted 35% in January reported job openings they could not fill, a figure that was unchanged from the previous month. A net 33%, also seasonally adjusted, reported raising pay in January, up four points from December.
Confidence among the nation’s home builders fell sharply in February. The National Association of Home Builders said its NAHB/Wells Fargo Housing Market Index declined to 42, down 5 points from the previous month, on concerns about tariffs, elevated mortgage rates and high housing costs.
“While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI,” NAHB chairman Carl Harris, a custom home builder from Wichita, Kan., stated in a press release. “Uncertainty on the tariff front helped push builders’ expectations for future sales volume down to the lowest level since December 2023. Incentive use may also be weakening as a sales strategy, as elevated interest rates reduce the pool of eligible home buyers.”
“With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs,” NAHB chief economist Robert Dietz added in a statement. “Reflecting this outlook, builder responses collected prior to a pause for the proposed tariffs on goods from Canada and Mexico yielded a lower HMI reading of 38, while those collected after the announced one-month pause produced a score of 44. Addressing the elevated pace of shelter inflation requires bending the housing cost curve to enable adding more attainable housing.”
The three HMI component indexes were all lower in February. The index that gauges current sales conditions fell by 4 points, to 46; the component that measures sales expectations in the next six months dropped by 13 points, to 46; and the gauge that charts the traffic of prospective buyers fell by 3 points, to 29. Any number above 50 indicates that more builders view conditions as good rather than poor.
The Commerce Department said sales of new homes plunged by 10.5% in January to a seasonally adjusted annual rate of 657,000. Sales in December were, however, revised upward to 734,000 from a previously reported 698,000. “The drop in new-home sales is just one more piece of the puzzle, and it is becoming clearer, the economic activity in the first quarter is off to a slow-as-molasses start,” Christopher Rupkey, chief economist at FWDBONDS, told Reuters.
The median new home sale price rose by 3.7%, to $446,300, in January. Existing-home sales were significantly lower in January, falling by 4.9% to a seasonally adjusted annual rate of 4.08 million in a report from the National Association of Realtors.
“Mortgage rates have refused to budge for several months despite multiple rounds of short-term interest-rate cuts by the Federal Reserve,” Lawrence Yun, NAR’s chief economist, stated in a press release. “When combined with elevated home prices, housing affordability remains a major challenge.”
NAR said the total housing inventory registered at the end of January was 1.2 million units, up 3.5% from December and 16.8% from the same month a year earlier. Unsold inventory in December was at a 3.5-month supply at the current sales pace, up from 3.2 months in December and 3 months in January of 2024.
“More housing supply allows strongly qualified buyers to enter the market,” Yun said. “But for many consumers, both increased inventory and lower mortgage rates are necessary for them to purchase a different home or become first-time homeowners.”
The median existing-home sale price in January was $396,900, up 4.8% from the same month a year earlier.
