Not Dark Yet (But is it Getting There?)

Consumer confidence soared just before the coronavirus caused the S&P 500’s worst week since 2008
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Tony McLachlan

Tony McLachlan

A key measure of consumer confidence climbed to a six-month high in February, although that survey was taken before concern about the possible impact of the coronavirus began to rise across the United States.

The Conference Board reported that its Consumer Confidence Index inched up to 130.7 from 130.4 the previous month. “Consumer confidence improved slightly in February, following an increase in January,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “Despite the decline in the Present Situation Index, consumers continue to view current conditions quite favorably. Consumers’ short-term expectations improved, and when coupled with solid employment growth, should be enough to continue to support spending and economic growth in the near term.”

The Conference Board also reported that consumers assessed current business conditions slightly less favorably in February. Those who said conditions were “good” fell from 40 percent to 38.6 percent; those who said business conditions were “bad” rose from 10.4 percent to 11.9 percent.

The short-term outlook was more favorable. Consumers who expected conditions to improve during the next six months increased from 18.4 percent to 20.4 percent; those who expected conditions to worsen dropped from 8.6 percent to 7.4 percent.

A separate measure of consumer confidence also rose in February. The University of Michigan reported that its Consumer Sentiment Index climbed to 101 from 99.8 in January.

“The coronavirus was mentioned by 8 percent of all consumers in February when describing the reasons for their economic expectations,” says Richard Curtin, chief economist of the university’s Surveys of Consumers. “However, on [Feb. 25 and 26], the last days of the February survey, 20 percent mentioned the coronavirus due to the steep drop in equity prices as well as the [Centers for Disease Control and Prevention] warnings about the potential domestic threat of the virus. While too few cases were conducted to attach any statistical significance to the findings, it is nonetheless true that the domestic spread of the virus could have a significant impact on consumer spending.”

The U.S. Department of Commerce reported that the nation’s gross domestic product rose 2.1 percent in the fourth quarter, marking no change in the initially reported rate. However, the rise in consumer spending for the quarter was revised downward to 1.7 percent from an initial estimate of 1.8 percent.

Tony McLachlan, president and CEO of Veratron US Inc., sees the U.S. economy as stable. Switzerland-based Veratron AG develops, engineers and produces sensors and controls, as well as analog and digital displays and instrument gauges.

“Veratron supplies products to a variety of both U.S.-based customers and international companies that sell to the U.S. market,” McLachlan says. “Over the past several years, we have observed some manageable fluctuations in the U.S. economy driven by exchange rates, interest rates and raw-material supplies. More recently, the U.S. has begun to experience supply chain and economic impacts from the COVID-19 coronavirus outbreak, but the overall U.S. economy looks stable, with demand for electrical and electronic products expected to increase. At Veratron, we see very favorable economic conditions for success in the U.S.”

When he analyzes the U.S. economy, McLachlan says, “boat manufacturers are usually guiding the overall marine market trends; therefore, we maintain a close watch on their developments within the various market segments. Since our OEM customer projects make up a large portion of our business, we look closely at their new-project planning and life-cycle roadmap, factoring these trends into our own design and manufacturing capacities to determine our product-development plans. We also look at sales and technology trends in adjacent markets, such as automotive and power sports.”

McLachlan says Veratron AG was formed in 2018 after a management buyout from Continental Automotive of the VDO Marine business and brand, and its development and production facility in Ruthi, Switzerland. He says VDO Marine electrical and electronic accessories have been used by engine manufacturers, boatbuilders and the aftermarket for more than 45 years.

“We technically are a new company, with the management buyout that created Veratron occurring in 2018; yet in 2019 we achieved our financial targets and met market demands,” McLachlan says. “We’ve focused on strengthening existing customer relationships and reinforcing our commitment to the marine industry. We launched several new products last year that have been well received by U.S. and international customers, such as our 7-inch AcquaLink multifunction TFT display and compact Veratron GO GPS antenna and receiver. This, and additional product introductions, will drive growth for 2020.”

The Conference Board reported that its Leading Economic Index, which tries to predict future economic activity, rose 0.8 percent in January, to 112.1, after declines in December and November of last year.

“The strong pickup in the January U.S. LEI was driven by a sharp drop in initial unemployment insurance claims, increasing housing permits, consumers’ outlook on the economy and financial indicators,” says Ataman Ozyildirim, senior director of economic research at The Conference Board. “The LEI’s six-month growth rate has returned to positive territory, suggesting that the current economic expansion — at about 2 percent — will continue through early 2020. While weakness in manufacturing appears to show signs of softening, the COVID-19 outbreak may impact manufacturing supply chains in the U.S. in the coming months.”

The Commerce Department also reported that consumer spending slowed in January, rising 0.2 percent after a 0.3 percent increase in December. Personal income growth sped up, rising 0.6 percent after a 0.3 percent gain in December.

Inflation remained tame in January. The Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred gauge, rose just 0.1 percent in January and is up 1.7 percent from the previous January.

The increase left the PCE index below the Fed’s target rate of 2 percent.

The mood among small businesses improved in January. The National Federation of Independent Business reported that its Small Business Optimism Index rose 1.6 points, to 104.3. The reading was among the top 10 percent in the 46-year history of the survey, according to the NFIB.

“2020 is off to an explosive start for the small business economy, with owners expecting increased sales, earnings and higher wages for employees,” NFIB chief economist William Dunkelberg stated in a press release. “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.”

The NFIB reported that new-job creation rose in January, with companies adding an average of 0.49 workers. That was the highest level since March 2019.

“Finding qualified labor continues to eclipse taxes or regulations as a top business problem,” Dunkelberg stated. “Small-business owners will likely continue offering improved compensation to attract and retain qualified workers in this highly competitive labor market. Compensation levels will hold firm unless the economy weakens substantially, as owners do not want to lose the workers that they already have.”

In the housing market, the National Association of Home Builders reported that builder confidence in the market for single-family homes moved 1 point lower, to 74, in February on the NAHB/Wells Fargo Housing Market Index, but remained at a historically high level.

The NAHB stated that its last three monthly readings were the highest sentiment levels since December 2017.

“Steady job growth, rising wages and low interest rates are fueling demand, but builders are still grappling with increasing construction and development costs,” NAHB chairman Dean Mon stated in a press release.

NAHB chief economist Robert Dietz added: “At a time when demand is on the rise, regulatory constraints, along with a shortage of construction workers and a dearth of lots, are hindering the production of affordable housing in local communities across the nation. And while lower mortgage rates have improved housing affordability in recent months, accelerating price growth due to limited inventory may offset some of that effect.”

The group reported that its index that gauges current sales conditions fell 1 point, to 80. The component that measures sales expectations in the next six months was also 1 point lower, at 79, and the gauge that charts the traffic of prospective buyers likewise decreased 1 point, to 57.

Any number above 50 indicates that more builders see conditions as good rather than poor.

Sales of new homes were sharply higher in January. The Commerce Department reported that sales rose 7.9 percent, to a seasonally adjusted annual rate of 764,000. It was the fastest sales pace since July 2007.

“After ending an otherwise strong 2019 on a down note — declining for three straight months — sales of new homes started the new year off on the right foot,” Matthew Speakman, an economist at Zillow, told Forbes. “These data are obviously welcome news for the housing market, which has generally been riding some positive momentum in recent months but continues to struggle with record low levels of inventory.”

In the home resale market, the National Association of Realtors reported that sales fell 1.3 percent in January from December, to a seasonally adjusted annual rate of 5.46 million. On a year-over-year basis, sales were up 9.6 percent from 4.98 million at a seasonally adjusted annual rate in January of last year.

“Existing-home sales are off to a strong start at 5.46 million,” Lawrence Yun, the NAR’s chief economist, stated in a press release. “The trend line for housing starts is increasing and showing steady improvement, which should ultimately lead to more home sales.”

The NAR reported that the median existing-home price in January was $266,300, up 6.8 percent from January 2019. Prices increased in every region of the country. The NAR also reported that January’s increase marked the 95th straight month of year-over-year price gains. 

This article originally appeared in the April 2020 issue.

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