Inflation fears are hurting US consumer confidence. Home prices are slowing

  • The Consumer Confidence Index fell 5.3 points to 102.5
  • The gap in the labor market decreases to 32.5 from 38.1
  • Home price gains slow further in August

WASHINGTON (Reuters) – U.S. consumer confidence slipped in October after two consecutive monthly increases amid growing concerns about inflation and a possible recession next year, but households remained eager to buy expensive items such as cars and appliances.

Tuesday’s Conference Board survey also showed that more consumers intend to buy a home over the next six months, despite rising borrowing costs. A steady rise in consumers’ purchasing intentions could provide some stability to the economy in the near term.

But there are signs that sharp interest rate increases by the Federal Reserve are beginning to cool the labor market, with a lower proportion of consumers viewing jobs as “plentiful” and a rise in those saying employment “was hard to come”.

“The biggest risk is the unknown late effects of the Fed’s cumulative tightening, and the economy may not feel the full effects until next year when recession risks are high,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.

The Conference Board’s Consumer Confidence Index fell to 102.5 this month from 107.8 in September. Economists polled by Reuters had expected the index to reach 106.5. The decrease in confidence was in all age groups, but was more pronounced in the 35-54 group as well as in the 55-and-up group.

Regionally, there was a significant decrease in Florida, possibly due to Hurricane Ian and Ohio. Consumers’ expectations of 12-month inflation rose to 7.0%, likely reflecting a recent reversal in gasoline prices after falling over the summer, from 6.8% last month. Food is also still expensive.

Stubbornly high inflation and eroding confidence are a blow to President Joe Biden and Democrats’ hopes of retaining control of Congress in the November 8 midterm elections.

The Fed, battling the fastest-rising inflation in 40 years, raised its benchmark overnight interest rate from nearly zero in March to the current range of 3.00% to 3.25%, the fastest pace of policy tightening in a generation or more. That overall rate is likely to end in the middle of the 4% range, based on expectations of US central bank officials and recent comments.

The survey’s current situation indicator, based on consumers’ assessment of current business and labor market conditions, fell to 138.9, the lowest level since April 2021, from 150.2 in September.

Its expectations index, which is based on consumers’ short-term expectations of income, business and the labor market, fell to 78.1 from 79.5 last month. The expectations index remains below a reading of 80, a level linked to a recession and indicating that deflation risks could rise.

The survey’s so-called labor market differential, drawn from respondents’ opinions data on whether jobs are plentiful or hard to come by, fell to 32.5, the lowest reading since April 2021, from 38.1 in September.

This metric correlates with the unemployment rate from the Department of Labor and is still high by historical standards. Unemployment benefits data shows that the labor market remains tight.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.

High spending plans

Even as consumers fret about the economic outlook, they remain interested in buying more expensive items over the next six months, despite backing away from travel plans, indicating that many Americans intend to stay home during the holiday season.

The share of consumers who plan to purchase cars has risen to the highest level since July 2020. More consumers are planning to purchase appliances such as refrigerators, washing machines, and vacuum cleaners.

“Consumers have abundant excess savings and are willing to dig into this pile of cash to at least keep their real spending stable, even as inflation erodes real income,” said Scott Hoyt, chief economist at Moody’s Analytics in West Chester, Pennsylvania. .

Consumers were also more likely to buy a home, perhaps encouraged by the sharp slowdown in home price inflation.

But high mortgage rates are still an obstacle. The 30-year fixed-rate mortgage averaged 6.94% last week, the highest in 20 years, up from 6.92% the week before, according to data from mortgage finance agency Freddie Mac.

A separate report on Tuesday showed that the S&P CoreLogic Case-Shiller National Home Price Index rose 13.0% year over year in August after rising 15.6% in July. On a monthly basis, prices fell 0.9% in August, the second consecutive monthly decline.

A third report from the Federal Housing Finance Agency showed that home prices rose 11.9% in the 12 months to August after rising 13.9% in July. Prices were down 0.7% month over month after falling 0.6% in July. This was the first time since March 2011 that monthly prices recorded consecutive declines.

“We expect home price inflation to slow in the remainder of 2022, dropping to single digits by the end of the year and to zero by the second quarter of 2023,” said Nancy Vanden Houten, chief US economist at Oxford Economics in New York. “With home sales declining as deteriorating affordability has sidelined many buyers, prices will have to adjust. However, inventory remains low, and we believe this will keep home prices below.”

(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

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