Consumer confidence remains subdued, but inflation expectations continue to improve

(TND) — Consumer confidence is currently subdued. Assessments of current business conditions are improving, but assessments of the situation on the labor market are deteriorating.

However, none of the changes in the Conference Board's consumer confidence index for August were dramatic.

The non-partisan, non-profit think tank and business organization has been measuring consumer confidence since 1967.

The index value for August was 103.3 on Tuesday, slightly above the upwardly revised value of 101.9 in July.

The two components of the general consumer confidence index, the current situation index and the expectations index, both also recorded slight increases.

Stephanie Guichard, senior economist at the Conference Board, described this month's index reading as “kind of average.”

“It’s not exceptionally good, but it’s not bad,” she said.

The consumer confidence index for August remained within the narrow range that has prevailed in recent years.

From summer 2016 to spring 2020, the index value was above 100.

The index, which had reached a high of 137.9 over the past decade, fell to around 86 at the start of the pandemic.

Now people are feeling the slight increase in unemployment, Guichard said.

“I think the biggest change in the last few months has been in the labor market,” she said.

It's not that the job market is at rock bottom, but it's no longer rosy.

Last month, the U.S. economy added 114,000 new jobs, the second-lowest figure in the past year.

And the unemployment rate rose to 4.3%.

Until May, the unemployment rate was below 4 percent for two years in a row.

“And the thing is that the labor market has been very strong. It's a very good situation, but consumers are thinking, 'We've seen this before. This won't last forever, so at some point the labor market will get worse.' That's what's driving expectations,” Guichard said.

Business conditions are currently assessed as better and will continue to improve in the future, she said. This is the reason for the increase in the consumer confidence index this month.

Guichard said consumer sentiment was also positive.

Americans expect interest rates to fall.

And people have seen inflation slow down.

The Conference Board asked people about their inflation expectations for the coming year. Americans expect inflation to be 4.9% in a year.

Given current inflation, which has fallen below 3%, this figure could be shocking.

However, Guichard believes that people tend to overestimate future inflation and that the trend toward lower inflation expectations is more important than the poll numbers alone.

People were expecting inflation of 8 percent in early 2022, she said.

And since then, they have observed a steady decline in inflation expectations.

“We are not quite back to pre-pandemic levels yet, but we are getting very close,” Guichard said.

She pointed out that inflation expectations in her survey were around 4.5 percent even before the pandemic and even when real inflation was very low.

And current inflation expectations are the lowest since March 2020.

It is also possible that respondents in the survey overestimated the likelihood of a recession.

About two-thirds of respondents currently believe that a recession is fairly or very likely in the next twelve months.

However, this is down from the peak of 73% in May 2023.

Guichard said American consumers' recession expectations are lower and stable.

Home purchase plans fell to a new 12-year low, while car purchase plans improved slightly.

Americans showed a greater willingness to purchase other expensive items such as appliances and electronics.

“Real estate prices are still very high and then there is the double burden of very high interest rates,” said Guichard.

The National Association of Realtors reported last week that the typical price of an existing home is currently $422,600 – about 4% more than last year, 16% more than the last three years and 50% more than the last five years.

According to historical NAR data, a typical home would have cost $280,400 in July 2019.

According to Freddie Mac, mortgage rates fell sharply earlier this month and are now just under 6.5 percent.

The interest rate on a typical 30-year fixed-rate mortgage was as high as 7.79% last year.

Freddie Mac said last week that it expects interest rates to decline slightly by the end of the year.

Yet a similar mortgage three years ago would have cost a buyer less than half of what he or she would pay today.

In the Conference Board survey, participants were asked to assess their family’s financial situation.

Consumers' assessment of their family's current financial situation worsened in August, but their assessment of their family's future financial situation improved.

Overall, expectations regarding the family's financial situation are positive, said Guichard.

She noted that the wage increases have helped and she does not expect those wage increases to dry up anytime soon.

After the hiring problems they had during and after the pandemic, companies wanted to retain their employees, she said.

The Conference Board also conducted a survey of CEOs and found that the vast majority plan to increase their salaries by more than three percent next year, Guichard said.