Consumer confidence at record highs

Electronics manufacturer Navico is having its best growth year in 2018
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Navico CEO Leif Ottosson:  “We still see strong boatbuilder order books and orders for the last four months of the year are significantly ahead of this time last year.”

Navico CEO Leif Ottosson: “We still see strong boatbuilder order books and orders for the last four months of the year are significantly ahead of this time last year.”

The economic indicator that Navico CEO Leif Ottosson watches first and foremost is consumer confidence, and The Conference Board’s measure of the American consumer’s mood delivered good news to Navico and the rest of the recreational marine industry at the end of August.

The business research group said its Consumer Confidence Index rose 5.5 points, to 133.4, the best result in nearly 18 years.

“Consumer confidence increased to its highest level since October 2000 (when it was 135.8), following a modest improvement in July,” Lynn Franco, director of economic indicators at The Conference Board, says in a statement.

“Consumers’ assessment of current business and labor market conditions improved further. Expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018,’’ Franco adds. “Overall, these historically high confidence levels should continue to support healthy consumer spending in the near term.”

Consumer spending accounts for about 70 percent of U.S. economic activity.

Ottosson, who also monitors the stock market, consumer spending and job growth for additional insights, says the economy appears healthy but bears watching.

“The U.S. economy is doing well, but it has been a long economic growth cycle and the sustainability of accelerating budget deficits are things to keep an eye on,” he says. “The Fed’s rate hikes and the political uncertainty are other factors that could change the positive climate.”

Electronics manufacturer Navico is the parent of the Lowrance, Simrad, B&G and C-Map brands.

“Navico is probably seeing its best growth year ever in 2018,” Ottosson says, adding, “We still see strong boatbuilder order books, and our orders for the last four months of the year are significantly ahead of last year at the same time.”

Ottosson says President Donald Trump’s tariffs have had some effects on his company’s business, “but to a large part we have been able to plan ahead and reduce the effects of the tariff increases.”

The high confidence number implies that consumers aren’t overly worried about the effects the tariffs will have on them.

“That suggests a degree of skepticism about trade, inflation, or anything else knocking the economy off track,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, tells Reuters. “For now, consumers remain resiliently positive, which bodes well for household spending in the coming months.”

“Confidence is soaring to new heights, which makes us bullish on growth and forecasts that this expansion may indeed shatter records for longevity next summer,” Chris Rupkey, chief financial economist at MUFG Union Bank in New York, tells the Associated Press.

A separate survey by the University of Michigan offered a more tempered view of consumer confidence heading into the fall.

The university’s preliminary Consumer Sentiment Index for August, released Aug. 17, found that sentiment slipped to 95.3, its lowest level since last September, “with the decline concentrated among households in the bottom third in income,” Richard Curtin, chief economist of the university’s Surveys of Consumers, says in a statement.

The final index reading for the month rose to 96.2, but the gauge was still at its lowest level since January. It was 97.9 in July.

“The dominating weakness reflected much less favorable assessments of buying conditions, mainly due to less favorable perceptions of market prices,” Curtin adds. “Buying conditions for large household durables sank to the lowest level in nearly four years. When asked to explain their views, consumers voiced the least favorable views on pricing for household durables in nearly 10 years, since October 2008. Vehicle-buying conditions were viewed less favorably in August than any time in the last four years, with vehicle prices being judged less favorably than any time since the close of 1984.

“Home-buying conditions were viewed less favorably in early August than any time in the past 10 years, with home prices judged less favorably than any time since 2006,” Curtin adds. “These are extraordinary shifts in price perceptions, given that consumers anticipate an inflation rate in the year ahead of 2.9 percent in early August, unchanged from [July].

“The data suggest that consumers have become much more sensitive to even relatively low inflation rates than in past decades. As is usual at this stage in the business cycle, some price resistance has been neutralized by rising wages, although the falloff in favorable price perceptions has been much larger than ever before recorded. Overall, the data indicate that consumers have little tolerance for overshooting inflation targets, and to the benefit of the Fed, interest rates now play a more decisive role in purchase decisions.”

Ryan Sweet, an economist at Moody’s Analytics Inc., tells Bloomberg that “the truth about consumers is somewhere in between” the results of the two surveys, adding, “The relationship between confidence and spending is quite loose,” although “right now the consumer has plenty of tailwinds.”

The Conference Board says its Leading Economic Index, which measures the economy’s health, increased by 0.6 percent in July, to 110.7, after a gain of 0.5 percent the previous month. The index attempts to predict future economic activity.

“The U.S. LEI increased in July, suggesting the U.S. economy will continue expanding at a solid pace for the remainder of this year,” Ataman Ozyildirim, director of business cycles and growth research at The Conference Board, says in a statement.

Forward-looking indicators were strong.

“The strengths among the components of the leading index were very widespread, with unemployment claims, the financial components and the ISM New Orders Index making the largest positive contributions,” Ozyildirim adds.

The Commerce Department says consumer spending rose by a healthy 0.4 percent in July (retail sales were up 0.5 percent), but prices rose, as well.

The core Personal Consumption Expenditures Price Index, which excludes the food and energy categories and is the Federal Reserve’s preferred inflation gauge, rose 0.2 percent. That boosted the year-over-year increase in the core index to 2 percent from 1.9 percent in June.

A key small-company index improved in July. The Small Business Optimism Index of the National Federation of Independent Business rose 0.7 points, to 107.9.

The NFIB says it was the second-highest level in the survey’s 45-year history, just under the 1983 peak of 108. Eight of the 10 index components improved, led by plans to increase employment and expectations for rising sales and for expansion.

The NFIB says the July report set records in terms of owners reporting job-creation plans and those that had job openings.

“Small business owners are leading this economy and expressing optimism rivaling the highest levels in history,” NFIB president and CEO Juanita D. Duggan says in a statement. “Expansion continues to be a priority for small businesses, who show no signs of slowing as they anticipate more sales and better business conditions.”

“Despite challenges in finding qualified workers to fill a record number of job openings, they’re taking advantage of this economy and pursuing growth,” adds NFIB chief economist Bill Dunkelberg.

The housing market did not fare well in July. The Commerce Department says sales of new homes fell 1.7 percent, to a seasonally adjusted annual rate of 627,000, from 638,000 in June, although they were up 7.2 percent for the year through July.

Housing starts rose slightly in July, to an annual rate of 1.17 million, from a revised 1.16 million in June. They were up 11.6 percent in the Midwest and 10.4 percent in the South, but they fell by 11 percent in the West and 4 percent in the Northeast.

Through July, starts are 6.2 percent higher than they were during the same period last year.

The National Association of Realtors says sales of existing homes fell for the fourth month in a row in July, dropping 0.7 percent, to a seasonally adjusted annual rate of 5.34 million, from 5.38 million in June. Through July, sales were down 1.5 percent from a year earlier.

NAR chief economist Lawrence Yun says in a statement that price increases have reduced demand.

“Too many would-be buyers are either being priced out or are deciding to postpone their search until more homes in their price range come onto the market,” Yun says.

“In addition to the steady climb in home prices over the past year, it’s evident that the quick run-up in mortgage rates earlier this spring has had somewhat of a cooling effect on home sales,” Yun adds. “This weakening in affordability has put the most pressure on would-be first-time buyers in recent months, who continue to represent only around a third of sales despite a very healthy economy and labor market.”

This article originally appeared in the October 2018 issue.

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