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Rays of Light

Multiple reports show consumer confidence rising, but predictions about a possible recession persist
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A key indicator of U.S. consumer confidence rose for the first time in four months in August as the economy added 315,000 jobs.

The Conference Board reported that its Consumer Confidence Index climbed to 103.2 from a revised 95.3 in July.

“Consumer confidence increased in August after falling for three straight months,” Lynn Franco, senior director of economic indicators at the Conference Board, stated in a press release. “The Present Situation Index recorded a gain for the first time since March. The Expectations Index likewise improved from July’s nine-year low, but remains below a reading of 80, suggesting recession risks continue. Concerns about inflation continued their retreat but remained elevated.

“Meanwhile, purchasing intentions increased after a July pullback, and vacation intentions reached an eight-month high,” Franco added. “Looking ahead, August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short-term.”

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Meanwhile, a separate measure of the consumer’s mood was also higher in August. The University of Michigan reported that its Consumer Sentiment Index rose to 58.2 from 51.5 in July.

“The final August reading continued the early-month improvement in consumer sentiment, rising 13.0 percent above July, but remaining 17 percent below a year ago,” Joanne Hsu, director of the university’s Surveys of Consumers, stated in a press release. “Most of this increase was concentrated in expectations, with a 59 percent surge in the year-ahead outlook for the economy following two months at its lowest reading since the Great Recession.

“In addition, personal financial expectations rose 12 percent since July,” Hsu added. “The gains in sentiment were seen across age, education, income, region and political affiliation, and can be attributed to the recent deceleration in inflation. Lower-income consumers, who have fewer resources to buffer against inflation, posted particularly large gains on all index components. Their sentiment now even exceeds that of higher-income consumers, when it typically lags higher-income sentiment by over 15 points. Hopefully, this tentative improvement will continue, as overall sentiment remains extremely low by historical standards.”

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The U.S. Department of Labor reported that the unemployment rate was 3.7 percent in August. The professional and business services sector added 68,000 jobs, health-care employment rose by 48,000, and retail trade added 44,000 jobs.

“We want an orderly cooldown, and this was a Goldilocks report,” Jeffrey Roach, chief economist at LPL Financial, told the Washington Post. “These job gains weren’t too hot or too cold. They’re hitting that softish landing we want to see.”

The government reported that average hourly earnings rose by 10 cents, or 0.3 percent, to $32.36 during the month, and earnings rose by 5.2 percent during the 12-month period that ended in August.

The U.S. Department of Commerce reported that consumer spending rose just 0.1 percent in July. Personal income rose 0.2 percent.

“The baseline outlook is for the U.S. economy to remain recession-free,” Matt Colyar, an economist at Moody’s Analytics, told Reuters.

Inflation was up in July, but only slightly. The Personal Consumption Expenditures Price Index, excluding the volatile food and energy components, rose just 0.1 percent, which was the smallest amount since February 2021. The core PCE index rose 4.6 percent year-over-year in July. (The PCE is the Federal Reserve’s preferred inflation gauge.)

The Conference Board reported that its Leading Economic Index decreased by 0.4 percent in July, to 116.6, after declining by 0.7 percent in June.

“The U.S. LEI declined for a fifth consecutive month in July, suggesting recession risks are rising in the near term,” Ataman Ozyildirim, senior director, economics, at the Conference Board, stated in a press release. “Consumer pessimism and equity market volatility, as well as slowing labor markets, housing construction and manufacturing new orders, suggest that economic weakness will intensify and spread more broadly throughout the U.S. economy. The Conference Board projects the U.S. economy will not expand in the third quarter and could tip into a short but mild recession by the end of the year or early 2023.”

The mood at the nation’s small businesses was slightly improved in July. The National Federation of Independent Business reported that its Small Business Optimism Index rose 0.4 points, to 89.9, marking the sixth consecutive month that the index has been below the 48-year average of 98.

Thirty-seven percent of member business owners said inflation was the single most important problem in operating their business. That was the highest percentage since the fourth quarter of 1979.

“The uncertainty in the small business sector is climbing again as owners continue to manage historic inflation, labor shortages and supply-chain disruptions,” Bill Dunkelberg, the NFIB’s chief economist, stated in a press release. “As we move into the second half of 2022, owners will continue to manage their businesses into a very uncertain future.”

Forty-nine percent of owners reported having job openings they could not fill. A net 48 percent of owners said they raised pay during the month.

Confidence among the nation’s home builders fell for the eighth month in a row in August. The National Association of Home Builders reported that its NAHB/Wells Fargo Housing Market Index dropped six points, to 49.

“Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders,” NAHB chairman Jerry Konter, a home builder and developer from Savannah, Ga., stated in a press release. “And in a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, the August buyer traffic number in our builder survey was 32, the lowest level since April 2014, with the exception of the spring of 2020, when the pandemic first hit.”

NAHB chief economist Robert Dietz added: “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession. The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand side of the market in the coming months.”

All three HMI component indexes declined in August to their lowest level since May 2020. The index that gauges current sales conditions fell seven points, to 57; the gauge that measures sales expectations in the next six months dropped two points, to 47; and the component that charts the traffic of prospective buyers declined five points, to 32.

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

The Commerce Department reported that sales of new homes fell 12.6 percent in July, to a seasonally adjusted annual rate of 511,000. That was the lowest level since January 2016. The median sales price rose 5.9 percent, to $439,400.

Existing-home sales fell in July for the sixth month in a row. The National Association of Realtors reported that sales were down 5.9 percent, to a seasonally adjusted annual rate of 4.81 million.

“The ongoing sales decline reflects the impact of the mortgage rate peak of 6 percent in early June,” NAR chief economist Lawrence Yun stated in a press release. “Home sales may soon stabilize since mortgage rates have fallen to near 5 percent, thereby giving an additional boost of purchasing power to home buyers.”

The NAR also reported that the median existing-home price in July was $403,800, marking 125 consecutive months of year-over-year price increases. The NAR says that is the longest-running streak on record. 

This article was originally published in the October 2022 issue.

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