US consumer confidence drops near 1-1/2-year low; house prices still high

U.S. consumer confidence dropped to nearly a 1-1/2-year low in July amid persistent worries about higher inflation and rising interest rates, pointing to slower economic growth at the start of the third quarter.

The survey from the Conference Board on Tuesday also showed consumers were less optimistic in their assessment of the labor market. That, combined with other data showing new home sales tumbled to their lowest level in just over two years in June, painted a picture of an economy vulnerable to a recession.

Economic activity is cooling as the Federal Reserve aggressively tightens monetary policy to tame inflation. The U.S. central bank is expected to raise its policy rate by another 75 basis points on Wednesday, which would bring the total interest rate hikes since March to 225 basis points.

“While lower confidence does not always lead to spending lower, the recent loss of momentum doesn’t bode well for consumption,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.

The Conference Board’s consumer confidence index dropped 2.7 points to a reading of 95.7 this month, the lowest level since February 2021. It was the third straight monthly decline. Economists polled by Reuters had forecast the index would fall to 97.2.

People shop at a 99 Cents retail store in the Bronx borough of New York City, U.S., July 13, 2022. REUTERS/Shannon Stapleton

The survey’s present situation index, based on consumers’ assessment of current business and labor market conditions, fell to 141.3 from 147.2 in June. Its expectations index, based on consumers’ short-term outlook for income, business, and labor market conditions, ticked down to 65.3 from 65.8 last month.

“Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months,” said Lynn Franco, senior director of economic indicators at the Conference Board in Washington.

The survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, fell to a still-high 37.8 this month from a reading of 39.9 in June. This measure correlates to the unemployment rate from the Labor Department and suggests a still-healthy jobs market. But the labor market is cooling, with new claims for unemployment benefits at an eight-month high.

U.S. stocks were trading lower. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

SPENDING REASSESSED

Consumers’ inflation expectations over the next 12 months eased to 7.6% from 7.9% in June.

High inflation is forcing consumers to reassess spending plans. The share of consumers planning to buy a motor vehicle over the next six months fell. Fewer consumers intended to buy major household appliances like refrigerators, washing machines, dryers, and televisions.

That suggests consumer spending was tepid at the start of the third quarter after an expected slowdown in the April-June quarter. Sluggish consumer spending, which left businesses with excess inventory, is expected to have resulted in the economy barely growing in the second quarter.

Walmart on Monday slashed its profit forecast and said it needed more price cuts to pare inventories.

The government’s snapshot of third-quarter gross domestic product on Thursday is likely to show GDP rebounding at a 0.5% annualized rate, according to a Reuters survey of economists. The economy contracted at a 1.6% pace in the first quarter.

Though the odds of a recession are rising, some economists believe the economy could skirt a downturn, noting the labor market continued to generate jobs at a brisk clip and that there were 11.3 million job openings at the end of May. Savings also remain high, which could support spending.

Consumers this month also showed less inclination to buy a house as rising mortgage rates and record house prices eroded affordability, suggesting there would be further declines in home sales. A separate report from the Commerce Department showed new home sales tumbled 8.1% to a seasonally adjusted annual rate of 590,000 units last month, the lowest level since April 2020.

Sales fell in the Northeast, the West, and the densely populated South, but surged in the Midwest.

Despite slowing demand, a housing market collapse is unlikely because of a severe shortage of homes, keeping prices elevated. The pace of increase, however, is slowing.

The third report on Tuesday showed the S&P CoreLogic Case-Shiller national home price index increased 19.7% on a year-on-year basis in May after surging 20.6% in April. Big price gains were recorded in Tampa, Miami, and Dallas.

The ongoing strong house price inflation was reinforced by a fourth report from the Federal Housing Finance Agency that showed home prices increased 18.3% in the 12 months through May after accelerating by 18.9% in April.

“Unmet demand and inventory that remains relatively scarce will keep home prices from declining outright at the national level, particularly if mortgage rates retreat from their recent levels,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.