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Uncertainty, but No Recession

Consumers are trying to get a handle on inflation, the war in Ukraine and supply-chain disruptions from Covid-19
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Consumer spending is up, but so are inflation, housing prices and concerns about the war in Ukraine, leading to mixed readings about consumer confidence amid continuing projections that the underlying economy is fundamentally strong.

The Conference Board reported that its Consumer Confidence Index fell to 107.3 from 107.6 in March. “Consumer confidence fell slightly in April after a modest increase in March,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The Present Situation Index declined but remains quite high, suggesting the economy continued to expand in early Q2. Expectations, while still weak, did not deteriorate further amid high prices, especially at the gas pump, and the war in Ukraine. Vacation intentions cooled, but intentions to buy big-ticket items such as automobiles and many appliances rose somewhat.

“Still, purchasing intentions are down overall from recent levels as interest rates have begun rising,” Franco added. “Meanwhile, concerns about inflation retreated from an all-time high in March but remained elevated. Looking ahead, inflation and the war in Ukraine will continue to pose downside risks to confidence and may further curb consumer spending this year.”

A separate measure of consumer mood rose in April. The University of Michigan reported that its Consumer Sentiment Index climbed to 65.2 from 59.4 in March. “Most of the surge was concentrated in expectations, with gains of 21.6 percent in the year-ahead outlook for the economy and an 18.3 percent jump in personal financial expectations,” Richard Curtin, director emeritus of the university’s Surveys of Consumers, stated in a press release. “The cause was a sharp drop in gas price expectations, falling to just 0.4 cents from last month’s 49.6. The overall impact on sentiment trends, however, was quite small: Other than the last two months, the Sentiment Index in April was still lower than in any prior month in the past decade.

Interest rates, inflation and  materials costs are hindering  the housing market.

Interest rates, inflation and materials costs are hindering the housing market.

“The downward slide in confidence represents the impact of uncertainty, which began with the pandemic and was reinforced by cross-currents, including the negative impact of inflation and higher interest rates, and the positive impact of a persistently strong labor market and rising wages,” Curtin added. “The global economy has added even more uncertainties about prospects for the U.S. economy, including the growing involvement in the military support for Ukraine and renewed supply-line disruptions from the Covid crisis in China.”

The U.S. Department of Commerce reported that consumer spending rose a solid 1.1 percent in March. Personal income rose 0.5 percent. “There’s nothing about to go wrong with the economy with the consumer still cheerleading the way forward to prosperity,” Christopher Rupkey, chief economist at FWDBonds in New York, told Reuters. “No recession on the horizon, yet.”

Inflation continued to rise. The Personal Consumption Expenditures Price Index climbed 0.9 percent in March. That was the largest increase since September 2005. In the 12-month period through March, the PCE price index rose 6.6 percent. That was the largest gain since January 1982. The PCE price index is the Federal Reserve’s preferred inflation gauge.

The Conference Board reported that its Leading Economic Index rose 0.3 percent in March, to 119.8, after a 0.6 percent increase in February. “The U.S. LEI rose again in March despite headwinds from the war in Ukraine,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “This broad-based improvement signals economic growth is likely to continue through 2022 despite volatile stock prices, and weakening business and consumer expectations. The Conference Board projects 3 percent year-over-year U.S. GDP growth in 2022, which is slower than the 5.6 percent pace of 2021 but still well above the pre-Covid trend.

Russia’s invasion of Ukraine is adding to economic headwinds.

Russia’s invasion of Ukraine is adding to economic headwinds.

“This rate also reflects a 0.5 percentage-point downgrade incorporated in our base case to include the effects of the war in Ukraine, compared to before the war (3.5 percent),” Ozyildirim added. “However, downside risks to the growth outlook remain, associated with intensification of supply-chain disruptions and inflation linked to lingering pandemic shutdowns and the war, as well as with tightening monetary policy and persistent labor shortages.”

The mood at the nation’s small businesses darkened in March. The National Federation of Independent Business reported that its Small Business Optimism Index fell 2.4 points, to 93.2. “Inflation has impacted small businesses throughout the country and is now their most important business problem,” NFIB chief economist Bill Dunkelberg stated in a press release. “With inflation, an ongoing staffing shortage and supply-chain disruptions, small business owners remain pessimistic about their future business conditions.”

A seasonally adjusted net 49 percent of business owners said they raised pay during March, a percentage that the NFIB reported was down just 1 percent from a 48-year record-high reading in January.

Confidence among the nation’s homebuilders declined in April. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index fell two points, to 77. “Despite low existing inventory, builders report sales traffic and current sales conditions have declined to their lowest points since last summer, as a sharp jump in mortgage rates and persistent supply-chain disruptions continue to unsettle the housing market,” NAHB chairman Jerry Konter, a builder and developer from Savannah, Ga., stated in a press release. “Policymakers must take proactive steps to fix supply-chain issues that will reduce the cost of development, stem the rise in home prices and allow builders to increase production.”

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NAHB chief economist Robert Dietz added: “The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market.”

The HMI index that gauges current sales conditions fell two points, to 85; the component that charts the traffic of prospective buyers showed a six-point decline, to 60; and the gauge that measures sales expectations in the next six months increased three points, to 73, after a 10-point drop in March. Any number above 50 indicates that more builders view conditions as good rather than poor.

The Commerce Department reported that new-home sales fell 8.6 percent, to a seasonally adjusted annual rate of 763,000, in March. The median sales price for a new home in March was $436,700. That is about $77,000 higher than the median price in the same month a year earlier. Sales were lower in all four regions of the country.

Existing-home sales also fell in March. The National Association of Realtors reported that sales fell 2.7 percent, to a seasonally adjusted annual rate of 5.77 million. The NAR says sales were lower in three of the four regions of the country. They were steady in the West.

“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” Lawrence Yun, the NAR’s chief economist, stated in a press release. “Still, homes are selling rapidly, and home price gains remain in the double digits.”

The median existing-home price was $375,300 in March, up 15 percent from the same month a year earlier, which marks 121 months of consecutive year-over-year increases. The NAR says that is the longest-running streak on record. “Home prices have consistently moved upward as supply remains tight,” Yun stated. “However, sellers should not expect the easy-profit gains and should look for multiple offers to fade as demand continues to subside.” 

This article was originally published in the June 2022 issue.

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