A key index of consumer confidence fell in July to its lowest level since February 2021 as rising inflation continued to cut into consumer spending, fanning fears of a recession.
The Conference Board reported that its Consumer Confidence Index dropped to 95.7 from a revised 98.4 in June.
“Consumer confidence fell for a third consecutive month in July,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The decrease was driven primarily by a decline in the Present Situation Index — a sign that growth has slowed at the start of Q3. The Expectations Index held relatively steady but remained well below a reading of 80, suggesting recession risks persist. Concerns about inflation — rising gas and food prices, in particular — continued to weigh on consumers.
“As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes and major appliances all pulled back further in July,” Franco added. “Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months.”
A separate measure of the consumer’s mood was up slightly in July but remained at a very low level. The University of Michigan reported that its Consumer Sentiment Index rose to 51.5 from 50 in June.
“The final July reading showed little change in consumer sentiment from its historic low in June,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “The one-year economic outlook fell to its lowest reading since 2009. At the same time, concerns over global factors have eased somewhat. This easing provided some limited support to buying conditions for durables, which remained near the all-time low reached last month, as well as a modest retreat in long-run inflation expectations.
“However, inflation continued to dominate consumers’ attention, and labor market expectations continued to soften,” Hsu added. “[July’s] Sentiment Index was the second-lowest reading on record, and the Q2 slowdown in personal consumption expenditures was no surprise. The final July reading of the median expected year-ahead inflation rate was 5.2 percent, little changed from mid-month or the preceding two months.”
The U.S. Department of Commerce reported that consumer spending rose 1.1 percent in June. However, Neil Saunders, managing director of analytics company GlobalData, told The Washington Post that the increase was almost wholly driven by inflation.
“So essentially Americans are having to spend more to buy the same amount of stuff,” Saunders said. “The increase in expenditure is also running well below the increase in income, which suggests that many households are having to dip into savings or take on debt to fund their spending.”
Inflation rose again in June. The Personal Consumption Expenditures Price Index, minus the volatile food and energy categories, was up 0.6 percent. The core rate over the previous year through June was up 4.8 percent. The PCE is the Federal Reserve’s preferred inflation gauge.
The Conference Board reported that its Leading Economic Index declined by 0.8 percent in June, to 117.1, after falling by 0.6 percent in May.
“The U.S. LEI declined for a fourth consecutive month, suggesting economic growth is likely to slow further in the near term as recession risks grow,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “Consumer pessimism about future business conditions, moderating labor market conditions, falling stock prices and weaker manufacturing new orders drove the LEI’s decline in June. The coincident economic index, which rose in June, suggests the economy grew through the second quarter. However, the forward-looking LEI points to a U.S. economic downturn ahead.”
The mood at the nation’s small businesses darkened in June. The National Federation of Independent Business reported that its Small Business Optimism Index fell 3.6 points, to 89.5. That marks the sixth straight month that the index has been below the 48-year average of 98.
“As inflation continues to dominate business decisions, small business owners’ expectations for better business conditions have reached a new low,” NFIB chief economist Bill Dunkelberg stated in a press release. “On top of the immediate challenges facing small business owners, including inflation and worker shortages, the outlook for economic policy is not encouraging, either, as policy talks have shifted to tax increases and more regulations.”
Fifty percent of member business owners reported job openings that they could not fill in June. That was down 1 percent from May, but the NFIB reported that the figure was historically very high.
A net 48 percent of owners, seasonally adjusted, reported raising pay in June, down 1 percent from May.
Confidence among the nation’s home builders fell sharply in July. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index dropped 12 points, to 55. It was the seventh straight monthly decline.
“Production bottlenecks, rising home-building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home,” NAHB chairman Jerry Konter, a home builder and developer from Savannah, Ga., stated in a press release. “In another sign of a softening market, 13 percent of builders in the HMI survey reported reducing home prices in the past month to bolster sales and/or limit cancellations.”
NAHB chief economist Robert Dietz added: “Affordability is the greatest challenge facing the housing market. Significant segments of the home-buying population are priced out of the market. Policymakers must address supply-side issues to help builders produce more affordable housing.”
All three HMI indices had declines in July. The component that measures current sales dropped 12 points, to 64; the gauge that measures sales expectations in the next six months fell 11 points, to 50; and the component that charts the traffic of prospective buyers fell 11 points, to 37. Any number above 50 indicates that builders view conditions as good rather than poor.
The Commerce Department reported that new-home sales fell 8.1 percent in June, to a seasonally adjusted annual rate of 590,000, down from a revised 642,000 in May. The number of sales was the lowest since April 2020, during the worst of the Covid-19 pandemic.
Existing-home sales declined for the fifth consecutive month in June. The National Association of Realtors reported that sales fell 5.4 percent, to a seasonally adjusted annual rate of 5.12 million.
“Falling housing affordability continues to take a toll on potential home buyers,” NAR chief economist Lawrence Yun
stated in a press release. “Both mortgage rates and home prices have risen too sharply in a short span of time.”
The NAR also reported that the median existing-home price was $416,000, up 13.4 percent from the same month a year earlier. This marks 124 consecutive months of year-over-year increases, which the NAR says is the longest-running streak on record.
This article was originally published in the September 2022 issue.