Thursday, March 31, 2022
The real change in March consumer confidence masked by February revisions.
According to the Conference Board Consumer Confidence Index, consumer confidence “increased” in March to 107.2, but that is based off the sizable downward revision to the initial February level. March consumer confidence is actually lower than last month’s initial estimate. The Conference Board has downwardly revised four of the last five months, indicating a much deeper crack in consumer confidence. Rising gas prices and volatile Russian relations explain much of the headwinds to confidence as consumer confidence in March is 17 points below the corresponding month in 2019. Although total gas spending by the average consumer is fairly low, the ubiquitous gas sign confronts consumers constantly, even when commute distances are shorter in a post-COVID-19 economy. Given the geopolitical tensions with Russia and the sustained domestic inflation worries, consumer confidence in the coming months will likely be suppressed.
But suppressed Consumer Confidence does not always foreshadow a recession.
So how do we interpret this report in light of these uncertain economic times? The real significance of this report stands out in the individual questions. But first, we look at the historical levels of the headline index. A decline in consumer confidence does not always foreshadow an imminent recession. As noted in the boxed areas in Figure 1, the Index fell in the mid 1980s and throughout the 1990s and recessions did not immediately follow. “On the contrary, during the late 1980s, consumer confidence steadily rose after the low point in January 1987,” explained LPL Financial Chief Economist Jeffrey Roach. Even though recession risks are rising, the LPL Research base case scenario is no recession in the U.S. this year, assuming the Federal Reserve (Fed) does not overtighten and supply constraints ease, to list just a few risks to growth. The weak survey in January and February is consistent with the overall narrative that Q1 Gross Domestic Product growth will be very low, but if inflation pressures subside and the labor market remains solid, GDP growth should recover in the latter half of the year.
Figure 1: Not All Declines in Confidence Foreshadow Recession
* Consumer Confidence
Source: LPL Research, The Conference Board, NBER Recession Dating Committee
The Devil is in the details with plenty of warning signs.
Dissecting the report reveals a few interesting tidbits about the current economic situation. Consumers indicate that the labor market is still very tight in March, building anticipation for a rosy employment report on April 4. If we believe the Conference Board survey, unemployment will likely stay low in March while March job gains approach 400,000. The difference between consumers reporting jobs are plentiful versus those reporting jobs are hard to get is the highest in history. “Consumers’ view of the labor market is the rosiest on record, so expect the job market to remain tight until participation rates increase,” warned LPL Financial Chief Economist Jeffrey Roach.
Respondents this month indicate softening demand for autos, especially used autos. Throughout this recovery, inflation metrics were boosted by high-used vehicles. This month’s report from the Conference Board implies that auto sales will begin to slow down, relieving some pricing pressure on both new and used car prices.
The Conference Board reported steady home buying plans for the next six months. Rising mortgage rates could start affecting homebuyers in the future but there’s no real evidence yet as inventory remains low.
Inflation expectations jumped the highest on record, which sends a warning sign to the Fed. This consumer survey must be compared with market expectations, which communicates something much less drastic. The market expects longer-term inflation to hover around 2.4% five years from now.
Regional measures show a divided country.
This country experienced the pandemic-induced recession of 2020 and the subsequent recovery in many different ways. Some industries successfully shifted from commercial office to home office. But, other industries shifted from open assembly lines to completely closed operations. Regions with a concentration of remote work flexibility could weather this storm better than regions with a concentration on location-specific work such as manufacturing and services. As of March 2022, consumer confidence in the New England region, which includes Connecticut, Massachusetts, New Hampshire, and Rhode Island, has improved since March 2019. However, states in the central region of the Unites States are far from returning to pre-COVID-19 confidence levels. The Mountain region, which includes states relying on tourism, is faring the worst.
Figure 2: A Very Uneven Recovery*
*Change in Consumer Confidence by Region from March 2019
Source: LPL Research, The Conference Board
Consumers are feeling the headwinds from lingering supply constraints, rising rates, and persistent inflation. In the upcoming reports, we will be closely monitoring the home buying plans, labor market perception, and the bimonthly vacation plans. The underlying details of the report should give us a good read on the consumer. For now, the yellow light of caution is flashing.
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