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Consumers Are Tightening Their Wallets

Inflation and rising interest rates pose continuing challenges despite a strong labor market

A key measure of U.S. consumer confidence declined in May, even though the economy continued to expand, adding 390,000 jobs. The Conference Board’s Consumer Confidence Index fell to 106.4 from a reading of 108.6 in April.

“Consumer confidence dipped slightly in May after rising modestly in April,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The decline in the Present Situation Index was driven solely by a perceived softening in labor market conditions. By contrast, views of current business conditions — which tend to move ahead of trends in jobs — improved. Overall, the Present Situation Index remains at strong levels, suggesting growth did not contract further in Q2. That said, with the Expectations Index weakening further, consumers also do not foresee the economy picking up steam in the months ahead. They do expect labor market conditions to remain relatively strong, which should continue to support confidence in the short run.

“Meanwhile, purchasing intentions for cars, homes, major appliances and more all cooled — likely a reflection of rising interest rates and consumers pivoting from big-ticket items to spending on services,” Franco added. “Vacation plans have also softened due to rising prices. Indeed, inflation remains top of mind for consumers, with their inflation expectations in May virtually unchanged from April’s elevated levels. Looking ahead, expect surging prices and additional interest rate hikes to pose continued downside risks to consumer spending this year.”


A separate measure of the consumer’s mood also declined in May. The University of Michigan reported that its Consumer Sentiment Index fell to 58.4 from 65.2 in April.

“This recent drop was largely driven by continued negative views on current buying conditions for houses and durables, as well as consumers’ future outlook for the economy, primarily due to concerns over inflation,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “At the same time, consumers expressed less pessimism over future prospects for their personal finances than over future business conditions. Less than one quarter of consumers expected to be worse off financially a year from now.

“Looking into the long term, a majority of consumers expected their financial situation to improve over the next five years; this share is essentially unchanged during 2022,” Hsu added. “A stable outlook for personal finances may currently support consumer spending. Still, persistently negative views of the economy may come to dominate personal factors in influencing consumer behavior in the future.”

The U.S. Department of Labor reported that the unemployment rate remained at 3.6 percent in May for the third month in a row. That is the lowest rate during the Covid-19 pandemic. The leisure and hospitality sector added 84,000 jobs, professional and business services added 75,000, transportation and warehousing added 47,000, and construction added 36,000.

“There are signs that the white-hot labor market is cooling,” Sarah House, a senior economist at Wells Fargo, told The Washington Post. “But if you step back and look at the big picture, this is still an exceptionally strong pace of hiring.”


The government reported that average hourly earnings rose by 10 cents, or 0.3 percent, to $31.95 in May; earnings increased by 5.2 percent during the 12-month period that ended in May.

The U.S. Department of Commerce reported that consumer spending rose 0.9 percent in April. Personal income rose 0.4 percent.

“The economy can always turn on a dime, but at this point in the economic cycle, consumers are still spending their hearts out, keeping the recessionary winds at bay,” Christopher Rupkey, chief economist at FWDBonds in New York, told Reuters.

Inflation rose in April. The Personal Consumption Expenditures Price Index, excluding the volatile food and energy components, rose 0.3 percent for the third month in a row. The core PCE price index rose 4.9 percent year-over-year in April. That was the smallest increase since last December. The PCE is the Federal Reserve’s preferred inflation gauge.

The Conference Board reported that its Leading Economic Index decreased 0.3 percent in April, to 119.2, after a 0.1 percent increase in March.


“The U.S. LEI declined in April, largely due to weak consumer expectations and a drop in residential building permits,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “Overall, the U.S. LEI was essentially flat in recent months, which is in line with a moderate growth outlook in the near term.

“A range of downside risks — including inflation, rising interest rates, supply-chain disruptions and pandemic-related shutdowns, particularly in China — continue to weigh on the outlook,” Ozyildirim added. “Nevertheless, we project the U.S. economy should resume expanding in Q2 following Q1’s contraction in real GDP. Despite downgrades to previous forecasts, The Conference Board still projects 2.3 percent year-over-year U.S. GDP growth in 2022.”

The mood at the nation’s small businesses was stable in April. The National Federation of Independent Business reported that its Small Business Optimism Index was unchanged, at 93.2.

Thirty-two percent of member owners said inflation was the most important problem in operating their business. That was the highest reading since the fourth quarter of 1980.

“Small business owners are struggling to deal with inflation pressures,” NFIB chief economist Bill Dunkelberg stated in a press release. “The labor supply is not responding strongly to small businesses’ high wage offers, and the impact of inflation has significantly disrupted business operations.”

Forty-seven percent of member owners reported having job openings they could not fill. A net 46 percent of owners reported raising pay during the month. That figure was down 3 percent from March.

Confidence among the nation’s home builders dropped sharply in May. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index fell eight points, to 69.

Builder sentiment has now declined for five months in a row. The reading was the lowest since June 2020.

“Housing leads the business cycle, and housing is slowing,” NAHB chairman Jerry Konter, a builder and developer from Savannah, Ga., stated in a press release. “The White House is finally getting the message, and [on May 16] released an action plan to address rising housing costs that emphasizes a very important element long advocated by NAHB: the need to build more homes to ease the nation’s housing affordability crisis.”

NAHB chief economist Robert Dietz added: “The housing market is facing growing challenges. Building material costs are up 19 percent from a year ago, in less than three months mortgage rates have surged to a 12-year high, and, based on current affordability conditions, less than 50 percent of new and existing home sales are affordable for a typical family. Entry-level and first-time home buyers are especially bearing the brunt of this rapid rise in mortgage rates.”

The HMI index that gauges current sales conditions fell eight points, to 78; the gauge that measures sales expectations in the next six months dropped 10 points, to 63; and the component that charts the traffic of prospective buyers had a nine-point decline, to 52.

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 16.6 percent in April, to a seasonally adjusted average rate of 591,000, from 709,000 the previous month. Sales fell for the fourth month in a row. High prices and rising mortgage rates were blamed. The median price for a new home sold in April was a record $450,600.

Existing-home sales also declined in April. The National Association of Realtors reported that sales fell 2.4 percent from March to a seasonally adjusted annual rate of 5.61 million.

“Higher home prices and sharply higher mortgage rates have reduced buyer activity,” Lawrence Yun, the NAR’s chief economist, stated in a press release. “It looks like more declines are imminent in the upcoming months, and we’ll likely return to the pre-pandemic home sales activity after the remarkable surge over the past two years.”

The NAR reported that the median existing-home price in April was $391,200, marking 122 consecutive months of year-over-year increases. That is the longest-running streak on record. 

This article was originally published in the July 2022 issue.



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