Soaring Consumer Confidence Propels US Economy
US consumer confidence surged to a two-year high in July, fuelled by a continuously tight labor market and subsiding inflation, brightening the near-term economic outlook. However, despite the positive momentum, the economy hasn't fully recovered yet, with the latest survey from the Conference Board revealing mixed signals on Tuesday.
Consumer Behavior Amid Interest Rate Hikes
Consumers continue to express concerns over a potential recession within the next year, triggered by substantial interest rate hikes implemented by the Federal Reserve. Data indicated an increase in consumers planning to purchase motor vehicles and houses within the next six months. Conversely, intentions to purchase significant household appliances, such as refrigerators and washing machines, declined.
Changing Spending Habits and Economic Outlook
Notably, the trend towards reduced discretionary spending on services like travel, recreation, and gambling remains. Instead, consumers anticipate increasing spending on necessary services like healthcare and more affordable options like home streaming services. These behavioral shifts affirm economists' speculation that consumer spending is leveling out after accelerating at its fastest pace in two years during the first quarter.
Riding the Wave of Optimism
Despite the mixed signals, this survey, coupled with data on inflation, the housing market, and retail sales, raises optimism that the economy might avert a recession. According to Robert Frick, corporate economist with Navy Federal Credit Union, "Lower inflation is why confidence has surged, but Americans have become cautious, trimming spending and increasing savings, perhaps to prepare for a recession."
The Consumer Confidence Index Breaks Records
The Conference Board's consumer confidence index rose to 117 this month, reaching its highest point since July 2021. This increase exceeded economists' predictions and paralleled the trends reflected in the University of Michigan's sentiment survey.
Economic Uncertainty and Federal Reserve Action
As consumers' perceptions of the likelihood of a recession over the next year increased slightly, Fed officials initiated a two-day policy meeting, with the expectation of a 25 basis point rise in interest rates on Wednesday. The Fed has already increased its policy rate by 500 basis points since March 2022.
A Tightening Labor Market and Consumer Expectations
The survey data also showed that the labor market remains tight, despite slower job growth. This situation is evident from the increase in the survey's labor market differential. On a different note, consumers' 12-month inflation expectations dipped to their lowest point since November 2020.
House Prices Rise Amid Affordability Concerns
While there's a greater intention to buy houses among households, challenges loom as the supply shortage continues to push prices up. The Federal Housing Finance Agency reported a 0.7% rise in monthly house prices in May, matching the increase in April. Bright MLS's chief economist, Lisa Sturtevant, warned of an impending affordability ceiling in many markets due to low inventory and resilient housing demand.
