An important measure of consumer confidence fell slightly in December but remained at a historic high, providing cautious optimism about consumer spending in 2020.
The Conference Board’s Consumer Confidence Index fell to 126.5 from an upwardly revised 126.8 in November.
“Consumer confidence declined marginally in December, following a slight improvement in November,” Lynn Franco, director of economic indicators at The Conference Board, stated in a press release. “While consumers’ assessment of current conditions improved, their expectations declined, driven primarily by a softening in their short-term outlook regarding jobs and financial prospects. While the economy hasn’t shown signs of further weakening, there is little to suggest that growth, and in particular consumer spending, will gain momentum in early 2020.”
The percentage of consumers who say business conditions are good was nearly unchanged at 38.7 percent; those who say conditions are bad decreased to 11.1 percent from 13.6 percent.
A separate reading of consumer confidence rose in December to its highest level in seven months. The University of Michigan’s Consumer Sentiment Index climbed 2.5 points, to a historically high 99.3, from November’s final reading of 96.8.
“Most of the December gain was among upper-income households, with those in the top third of the income distribution gaining 7.5 percent from last month and those in the bottom two-thirds posting a gain of just 0.8 percent,” Richard Curtin, chief economist of the university’s Surveys of Consumers, stated in a press release. “The recent shift favoring higher-income households is in the opposite direction when compared with all-time peaks in the late 1990s. The [presidential] impeachment hearing had a barely noticeable impact on economic expectations, as it was mentioned by just 2 percent of all consumers in the December survey.
“Inflation expectations declined in the December survey, with both the year-ahead and five-year expected inflation rates falling,” Curtin added. “For the year ahead, an annual inflation rate of 2.3 percent was expected, the lowest since 2.2 percent was recorded twice, in December 2016 and September 2010, prior to the Great Recession’s lows. Over the next five years, consumers expected an annual inflation rate of just 2.2 percent in December 2019, the lowest level since this question was first introduced in the late 1970s.”
Ernie Ellis, president of Sea-Fire Marine, is encouraged about the state of the economy. “All economic signs — minimal Federal Reserve action, consumer confidence, minimal inflation, in-line historical price-to-earnings ratio — point to continued growth,” Ellis told Trade Only Today.
Ellis said Sea-Fire, which is based in Baltimore and makes marine fire-detection and suppression systems, had solid growth in 2019. The company offers products to the recreational marine market through an international network of distributors and dealers, and sells directly to premier yacht builders.
“We have had a positive and steady growth year of approximately 10 percent worldwide,” Ellis said. “This is comprised of U.S. growth of approximately 7.5 percent and international of 11.5 percent.”
Ellis said the company watches industry price-to-earnings ratios “to see that ratios are in range, that inflation is in check — as indicated by minimal Federal [Reserve] activity — that consumer confidence is high and unemployment is low.”
Ellis said Sea-Fire’s international business continues to be positive. “The U.S. economy affects our international market; there is a direct correlation, as our products are fitted on recreational craft imported into the U.S. market,” he said. “If U.S. consumer confidence remains high, individuals continue to purchase recreational craft fitted with our equipment.”
Other key economic indicators and events are also telling Ellis that 2020 should be a good year. “The stock market is continuing record highs, but the [price-to-earnings ratios] are not overvalued,” he said. “Inflation rates are low, and there are steady growth indicators: GDP. There are encouraging signs of a trade agreement with China. The passing and implementation of the United States-Mexico-Canada trade pact will also have positive effects.”
Ellis said President Trump’s tariffs have had only a minimal effect on Sea-Fire’s business, “as the majority of our products are made from U.S.-sourced components. Chinese-manufactured components that would be subject to U.S. tariffs on importation have had little to no effect on our products. We, however, are aware of yacht builders with production based in mainland China that may be subject to potential tariffs which will negatively impact them and, as a result, us as their product supplier. We remain cautiously optimistic for a positive resolution to the trade tariff war, which will only enhance the positive outlook for 2020.”
The Conference Board reported that its Leading Economic Index, which tries to predict future economic activity, was unchanged in November, staying at 111.6 after declines of 0.2 percent in September and October.
“Strength in residential construction, financial markets and consumers’ outlook offset weakness in manufacturing and labor markets,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “While the six-month growth rate of the LEI remains slightly negative, the index suggests that economic growth is likely to stabilize around 2 percent in 2020.”
The U.S. Department of Commerce reported that consumer spending increased by 0.4 percent in November, which was the best gain since July, and that personal income rose 0.5 percent. The spending increase included a 1 percent gain on goods such as cars and appliances.
Inflation, as measured by the Federal Reserve’s preferred price gauge, the Personal Consumption Expenditures Price Index, was 1.5 percent in November. That kept it below the Fed’s 2 percent target rate.
At a meeting in December at which the Fed decided to keep interest rates unchanged, Chairman Jerome Powell said rates would probably hold steady in the new year. He said that “our economic outlook remains a favorable one.”
A survey by Mastercard SpendingPulse reported that holiday sales rose 3.4 percent from 2018 and that online sales rose 18.8 percent. Consumer spending accounts for about 70 percent of U.S. economic activity.
Small-business confidence improved in November. The National Federation of Independent Business reported that its Small Business Optimism Index rose 2.3 points, to 104.7. The NFIB also reported that the month-to-month gain was the largest since May 2018.
Seven of the index’s 10 components advanced. The earnings component had a 10-point increase, and the category of business owners who say this is a good time to expand rose by six points. The category of owners who expect better business conditions increased by three points.
“This historic run may defy the expectations of many, but it comes as no surprise to small business owners who understand what a supportive tax and regulatory environment can do for their companies,” NFIB chief economist William Dunkelberg stated in a press release. “As the two-year anniversary of the Tax Cuts and Jobs Act’s passage [approached in December], small businesses, the world’s third-largest economy, are using those savings to power the American economy.”
In housing, builder confidence in the market for newly built single-family homes rose five points in December, to 76, from a November reading that was upwardly revised.
The December figure for the National Association of Home Builders/Wells Fargo Housing Market Index was the highest reading since June 1999.
“Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes, low mortgage rates and a strong labor market,” NAHB chairman Greg Ugalde, a home builder and developer from Torrington, Conn., stated in a press release.
NAHB chief economist Robert Dietz added: “While we are seeing near-term positive market conditions with a 50-year low for the unemployment rate and increased wage growth, we are still underbuilding due to supply-side constraints like labor and land availability. Higher development costs are hurting affordability and dampening more robust construction growth.”
All three components of the housing market index saw gains in December. The index that gauges current sales conditions rose seven points, to 84; the component that measures sales expectations in the next six months edged up 1 point, to 79; and the measure that charts the traffic of prospective buyers gained 4 points, to 58.
Any number above 50 indicates that builders see conditions as good rather than poor.
The Commerce Department reported that new-home sales rose 1.3 percent on a month-to-month basis in November, to a seasonally adjusted annual rate of 719,000. On an annual basis, sales were 19.4 percent higher.
By contrast, the National Association of Realtors reported that existing-home sales fell 1.7 percent from October, to a seasonally adjusted annual rate of 5.35 million in November, although sales were up 2.7 percent from the same month a year earlier.
Lawrence Yun, the NAR’s chief economist, was not overly concerned about the decline. “Sales will be choppy when inventory levels are low, but the economy is otherwise performing very well, with more than 2 million job gains in the past year,” Yun stated in a press release.
The median existing-home price in November was $271,300, up 5.4 percent from November 2018. Prices rose in all regions of the country. November’s price increase marks 93 consecutive months of year-over-year gains.