One Follows the Other

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A key indicator of consumer confidence rose in January as medical officials throughout the country continued to distribute vaccines in an effort to fight the Covid-19 pandemic. The Conference Board reported that its Consumer Confidence Index rose to 89.3 from a downwardly revised 87.1 in December.

“Consumers’ appraisal of present-day conditions weakened further in January, with Covid-19 still the major suppressor,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “Consumers’ expectations for the economy and jobs, however, advanced further, suggesting that consumers foresee conditions improving in the not-too-distant future. In addition, the percent of consumers who said they intend to purchase a home in the next six months improved, suggesting that the pace of home sales should remain robust in early 2021.”

A separate measure of consumer confidence slipped in January. The University of Michigan reported that its Consumer Sentiment Index fell to 79 from 80.7 in December. “Consumer sentiment remained largely unchanged in the last half of January from earlier in the month,” Richard Curtin, chief economist of the university’s Surveys of Consumers, stated in a press release. “Indeed, the overall level of the Sentiment Index has shown only relatively small variations since the pandemic started, averaging 81.5 in 2020, marginally above January’s 79. Needless to say, sentiment levels were well below the average of 97 from 2017 to 2019.

“Although the nation is still being ravished by the pandemic, and the nation’s cooperative reactions have been far from perfect, consumers have helped to dissipate the potential for further harm,” Curtin added. “Despite continuing job and income disparities, as precautionary motives begin to ease, accumulated savings will spark a significant gain in spending in late 2021.”

Rick French, a partner at Alpharetta, Ga.-based GSW and Associates, a manufacturer’s sales representative firm, says gains are already starting to appear. The first half of 2020 was off for the company, but the second half of the year was the “best six months we ever had,” he says, adding that “2021 has started off really strong.” This success is happening despite the pandemic continuing to force his team to work from home and be creative about putting product lines in front of customers.

When he analyzes the economy, French watches the stock market, the cost of fuel, consumer confidence, the job and housing markets, and the consumption of high-end products. “Right now, all things are pointing to another good year,” French says. “It’s kind of surprising, based on the results of the election. Let’s hope that the new administration can build on the incredible economic gains we realized in the last four years.”

Meanwhile, the Federal Reserve assured Americans that it remained committed to low interest rates to spur the economy. At a two-day meeting in late January, the Fed kept its benchmark interest rate near zero — in a range between zero and 0.25 percent — and said it would continue to buy at least $120 billion in bonds every month in an effort to hold down longer-term borrowing rates.

“The economy is a long way from our monetary policy and inflation goals, and it’s likely to take some time for substantial further progress to be achieved,” Fed Chairman Jerome Powell said during a press conference after the meeting.

The U.S. Department of Commerce reported that consumer spending fell 0.2 percent in December, dropping for the second month in a row. The pandemic was blamed, as states and municipalities restored restrictions on business, and as consumers wary of catching the coronavirus stayed home.

Personal income rose by 0.6 percent in December. Inflation also rose. The Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, was up 0.4 percent. The core rate, which removes the volatile food and energy sectors, was up 0.3 percent. Nonetheless, year-over-year inflation for 2020 rose just 1.3 percent.

“The Fed would like inflation to average 2 percent, so it would like inflation to temporarily move above 2 percent,” Gus Faucher, chief economist at PNC Financial in Pittsburgh, told Reuters. “Inflation pressures will remain limited to a few sectors, as high unemployment will restrain wage growth.”

The Conference Board’s Leading Economic Index rose 0.3 percent in December, to 109.5, after increases of 0.7 percent in November and 0.9 percent in October.

“The U.S. LEI’s slowing pace of increase in December suggests that U.S. economic growth continues to moderate in the first quarter of 2021. Improvements in the U.S. LEI were very broad-based among the leading indicators, except for rising initial claims for unemployment insurance and a mixed consumer outlook on business and economic conditions,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “While the resurgence of Covid-19 and weak labor markets remain barriers to growth, The Conference Board expects the economy to expand by at least 2.0 percent (annual rate) in Q1 and then gain momentum throughout the year.”

The mood among the nation’s small businesses darkened in December. The National Federation of Independent Business reported that its Small Business Optimism Index fell 5.5 points, to 95.9. That is below the average index value of 98 since 1973.

“[December’s] drop in small business optimism is historically very large, and most of the decline was due to the outlook of sales and business conditions in 2021,” NFIB chief economist Bill Dunkelberg stated in a press release. “Small businesses are concerned about potential new economic policy in the new administration and the increased spread of Covid-19 that is causing renewed government-mandated business closures across the nation.” Owners who expect better business conditions during the next six months declined 24 points, to a net negative 16 percent.

The National Association of Home Builders reported that confidence among its members slipped in January as material costs rose, led by a huge jump in lumber prices. The trade group said its NAHB/Wells Fargo Housing Market Index fell 3 points, to 83, but still remained at a strong level.

“Despite robust housing demand and low mortgage rates, buyers are facing a dearth of new homes on the market, which is exacerbating affordability problems,” NAHB chairman Chuck Fowke stated in a press release. “Builders are grappling with supply-side constraints related to lumber and other material costs, a lack of affordable lots and labor shortages that delay delivery times and put upward pressure on home prices. They are also concerned about a changing regulatory environment.”

NAHB chief economist Robert Dietz added: “While housing continues to help lead the economy forward, limited inventory is constraining more robust growth. A shortage of buildable lots is making it difficult to meet strong demand, and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability.”

All three of the major HMI indices declined in January. The index that gauges current sales conditions dropped 2 points, to 90; the component that measures sales expectations in the next six months fell 2 points, to 83; and the gauge that charts the traffic of prospective buyers decreased 5 points, to 68. Any number above 50 indicates that more builders see conditions as good rather than poor.

The Commerce Department reported that new-home sales rose 1.6 percent in December, to a seasonally adjusted annual rate of 842,000. The figure was up from a downwardly revised 829,000 in November. Sales rose for the first time since July. For the year, new-home sales totaled 811,000, up 15 percent from 2019. The median price for a new home rose 8 percent, to $355,900, in December from a year earlier.

Sales were also higher in the home resale market. The National Association of Realtors reported that existing-home sales increased 0.7 percent from November to a seasonally adjusted annual rate of 6.76 million in December.

“Home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic,” Lawrence Yun, the NAR’s chief economist, stated in a press release. “What’s even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market.”

The median existing-home price in December was $309,800, up 12.9 percent from December 2019, as prices increased in every region of the country. The price increase marks 106 straight months of year-over-year gains.

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