Two key indicators of U.S. consumer confidence reached multiyear highs in January as the economy blew past expectations and added 353,000 jobs. The jobs gain was nearly double what economists had predicted. It was the largest increase in a year.
The Conference Board said its Consumer Confidence Index rose to 114.8 from a downwardly revised 108 the previous month. The reading was the highest since December 2021. “January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead and generally favorable employment conditions as companies continue to hoard labor,” Dana Peterson, chief economist at The Conference Board, stated in a press release.
“The gain was seen across all age groups, but largest for consumers 55 and over,” Peterson added. “Likewise, confidence improved for all income groups except the very top; only households earning $125,000-plus saw a slight dip. January’s write-in responses revealed that consumers remain concerned about rising prices, although inflation expectations fell to a three-year low. Buying plans dipped in January, but consumers continued to rate their income and personal finances favorably currently and over the next six months.”
A separate indicator of consumer sentiment also rose sharply in January. The University of Michigan said its Consumer Sentiment Index climbed more than nine points, to 79, after a reading of 69.7 in December. “Consumer sentiment confirmed its early month reading, surging 13% to reach its highest level since July 2021, reflecting improvements in the outlook for both inflation and personal incomes,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release.
“January’s gain has been exceeded only five times since 1978, one of which was last month at an even larger increase of 14%,” Hsu added. “Consumers expressed gains in their views on their personal finances as well as the macroeconomy; the short-run business outlook soared 27%. After reserving judgment last fall about whether the slowdown in inflation would persist, consumers now feel assured that inflation will continue to soften.
“Sentiment has resumed the upward trajectory from the all-time low measured in June of 2022, which had stalled in the late summer and fall of 2023,” she said. “However, consumers expressed considerable disagreement about the future of the economy. About 41% of consumers expect good times in the year ahead for business conditions, while 48% expect bad times.”
The Labor Department said the nation’s unemployment rate remained at 3.7% in January. The rate has been below 4% for two years, which is the longest period under those conditions since the 1960s.
The government revised upward its job totals for November and December. November’s figure is now 182,000, up 9,000 from the original data, and the December total is 333,000, up 117,000 from the initial report.
The government said the professional and business services sector added 74,000 jobs in January. Other notable increases occurred in health care (70,000), the retail industry (45,000), government employment (36,000), social assistance (30,000) and manufacturing (23,000).
“Remarkable, resilient and robust is the only way to describe the juggernaut that is the American labor market,” Joe Brusuelas, chief economist at the accounting firm RSM, told The Washington Post. “We really are witnessing a historic recovery of the American economy following the shocks of the pandemic.”
“Given the Fed now wants strong job growth, as [Fed chairman] Jerome Powell told us [Jan. 31], this report should not discourage the Fed from cutting rates,” Chris Low, chief economist at FHN Financial in New York, told Reuters. “By the same token, however, it is not going to encourage them to rush into rate cutting.”
The Labor Department said average hourly earnings rose 19 cents, or 0.6%, to $34.55, in January. During the 12-month period that ended in January, earnings have increased 4.5%.
The federal funds rate will remain in a range of 5.25% to 5.5% at least until the Fed’s March 19-20 meeting. After the January meeting, Fed chairman Powell expressed doubt that the central bank will be confident enough about the state of the economy to reduce rates at the March meeting, saying that although inflation has shrunk dramatically during the past several months, policymakers need to become more confident that it is returning to the Fed’s 2% target level before announcing cuts.
“We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell told reporters at a post-meeting press conference.
The Commerce Department said consumer spending rose 0.7% in December after rising 0.4% the month before. “The strong gain in spending in December shows that consumer spending entered 2024 with momentum and suggests that consumption growth is on track for another strong gain in the first quarter,” Michael Pearce, lead U.S. economist at Oxford Economics, told MarketWatch. “However, stronger spending is being driven partly by falls in the saving rate, which is now at a 12-month low.”
The strong showing by the consumer ended a quarter in which the economy grew faster than economists expected. The Commerce Department said the nation’s gross domestic product grew 3.3% at an annualized rate during the fourth quarter. Growth for the full year was 2.5%.
“Whichever way you slice it, this report caps a year of stellar economic growth performance, particularly with the backdrop of the Fed’s aggressive monetary policy tightening cycle,” Olu Sonola, head of U.S. regional economics at Fitch Ratings in New York, told Reuters. “The momentum of economic growth going into 2024 is looking very good.”
Inflation rose slightly in December. The Commerce Department says the Personal Consumption Expenditures Price Index rose 0.2%. For the 12-month period through December, the index rose 2.6%, which was just 0.6% higher than the inflation rate that the Federal Reserve has been aiming for.
The core PCE index, which strips out volatile food and energy prices, also rose 0.2%. The core index rose 2.9% year-over-year in December, which was the smallest increase since March 2021. The PCE is the Fed’s preferred inflation gauge.
“Inflation dynamics inside the metric that the Fed uses to formulate policy strongly imply that the central bank will hit its inflation target in the near term,” Brusuelas, at RSM, told CNBC. “This will create the conditions in which it makes [its] policy pivot and begins a multiyear campaign in which it reduces the policy rate toward a range between 2.5% and 3%.”
Nonetheless, The Conference Board said its Leading Economic Index declined again in December, though only a little. The board said the index fell 0.1%, to 103.1, after an 0.5% decline in November. “The U.S. LEI fell slightly in December, continuing to signal underlying weakness in the U.S. economy,” Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board, stated in a press release. “Despite the overall decline, six out of 10 leading indicators made positive contributions to the LEI in December.
“Nonetheless, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment and low consumer confidence,” she added. “As the magnitude of monthly declines has lessened, the LEI’s six-month and 12-month growth rates have turned upward but remain negative, continuing to signal the risk of recession ahead. Overall, we expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.”
The mood at the nation’s small businesses improved in December. The National Federation of Independent Business said its Small Business Optimism Index rose 1.3 points, to 91.9, although that still left the index significantly below its 50-year average of 98. “Small-business owners remain very pessimistic about economic prospects this year,” NFIB chief economist Bill Dunkelberg stated in a press release. “Inflation and labor quality have consistently been a tough complication for small-business owners, and they are not convinced that it will get better in 2024.”
Confidence among the nation’s home builders surged in January. The National Association of Home Builders said its NAHB/Wells Fargo Housing Market Index climbed seven points, to 44. “Lower interest rates improved housing affordability conditions [in December], bringing some buyers back into the market after being sidelined in the fall by higher borrowing costs,” NAHB chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala., stated in a press release.
“Mortgage rates have decreased by more than 110 basis points since late October per Freddie Mac, lifting the future sales expectation component in the HMI into positive territory for the first time since August,” NAHB chief economist Robert Dietz added in a press release. “As home building expands in 2024, the market will see growing supply-side challenges in the form of higher prices and/or shortages of lumber, lots and labor.”
All three of the major HMI indexes gained ground in January. The index that charts current sales conditions rose seven points, to 48; the index that measures sales expectations in the next six months climbed 12 points, to 57; and the component that gauges the traffic of prospective buyers rose five 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 bounced back in December, rising 8% to a seasonally adjusted annual rate of 664,000, from an upwardly revised reading in November. On an annual basis, the government said 668,000 new homes were sold in 2023, up 4.2% from 641,000 the previous year.
“The solid new-home sales rate in December was fueled by a lack of existing inventory in the resale market and declining interest rates,” Huey, of the NAHB, stated in a press release. “New-home sales ended the year on a high note thanks largely to falling interest rates and a decline in existing home sales,” Danushka Nanayakkara-Skillington, the NAHB’s assistant vice president for forecasting and analysis, added in a press release. “And while moderating interest rates are a promising sign for new-home sales in the year ahead, long-term issues such as a shortage of buildable lots, a lack of skilled labor and excessive regulations will continue to pose challenges for builders.”
The median new-home sale price in December was $413,200, down 3% from the previous month and 13.8% from the same month year-over-year. Existing-home sales moved in the opposite direction, though not by much. The National Association of Realtors said sales fell 1% in December to a seasonally adjusted annual rate of 3.78 million.
“The latest month’s sales look to be the bottom before inevitably turning higher in the new year,” NAR chief economist Lawrence Yun stated in a press release. The NAR said the median existing-home price was $382,600, up 4.4% from December a year earlier.
“Despite sluggish home sales, 85 million homeowning households enjoyed further gains in housing wealth,” Yun added. “Obviously, the recent, rapid, three-year rise in home prices is unsustainable. If price increases continue at the current pace, the country could accelerate into haves and have-nots. Creating a path toward homeownership for today’s renters is essential. It requires economic and income growth, and, most importantly, a steady buildup of new home construction.”
This article was originally published in the March 2024 issue.
