Pessimism among American consumers grew in October amid lower expectations regarding business conditions and incomes.
The Conference Board Consumer Confidence Index fell in October for the third straight time, said an Oct. 31 press release detailing the survey results. “Consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular. Consumers also expressed concerns about the political situation and higher interest rates,” said Dana Peterson, chief economist at The Conference Board.
“Expectations for the next six months stayed below the recession threshold of 80, reflecting a decline in confidence about future business conditions, job availability, and incomes.”
More survey participants said that business conditions were bad compared to the previous survey. The number of people saying jobs were “plentiful” declined. The measure of “expected family financial situation” for the next six months continued its fall. Inflation expectations for the year ahead rose in October after remaining steady for three months.
Meanwhile, fears of an “impending recession remain elevated” among consumers, according to the release.
“More than two-thirds of consumers still said recession is ‘somewhat’ or ‘very likely’ in October,” Ms. Peterson stated. The Conference Board is anticipating a “short and shallow economic contraction” in the United States during the first half of next year.
The outlook for stock prices “weakened slightly,” while expectations of the Federal Reserve raising its interest rates in the year ahead moved up.
In September, The Conference Board Leading Economics Index (LEI), which provides an early indication of the state of the economy, declined. This marked “a year and a half of consecutive monthly declines since April 2022,” said Justyna Zabinska-La Monica, senior manager, Business Cycle Indicators, at The Conference Board.
“Although the six-month growth rate in the LEI is somewhat less negative, and the recession signal did not sound, it still signals risk of economic weakness ahead.”
Despite the “continued skepticism” about the economic future, U.S. consumers continued to “spend heavily” on both goods and services, said The Conference Board, according to the release. However, signals of future buying plans appear mixed, it stated.
Housing Recession
The Conference Board’s indication that consumer plans to buy homes are declining is concerning as a weak housing market is bad news for the economy and can contribute to a wider recession and economic slowdown.According to the National Association of Realtors (NAR), real estate accounts for almost 17 percent of the GDP and is a “major driver of the U.S. economy.”
In an Oct. 26 commentary, economists from Wells Fargo warned that rising borrowing costs stand to “tip the housing sector back into recession.”
“A strong labor market and moderating inflation have raised hopes that the U.S. economy can avoid a recession. Unfortunately, not every sector of the economy has been as sturdy in the face of rising debt costs. After generally improving in the first half of 2023, the residential sector now appears to be contracting alongside the recent move higher in mortgage rates,” it said.
According to data from Freddie Mac, the interest rate on a 30-year fixed-rate mortgage has jumped from 3.14 percent to 7.79 percent over the past two years.
“Looking ahead, higher mortgage rates are likely to worsen affordability for home buyers and bring about a weaker pace of residential activity in the near term,” Wells Fargo economists said.
“The recent retrenchment in mortgage applications for purchase is a sign that home buying is likely to take another step back over coming months.”
GDP Growth
Concerns of an economic recession persist despite a sharp jump in GDP growth.U.S. GDP grew by 2.7 percent in the third quarter of 2022, which was followed by growth rates of 2.6 percent, 2.2 percent, and 2.1 percent in the subsequent quarters, marking a declining trend. However, this year’s third-quarter GDP more than doubled to 4.9 percent from the previous quarter.
The sharp upturn in third-quarter GDP was driven by robust consumer spending. Some experts do not see this trend continuing given that the U.S. economy is facing many challenges, including rising bond yields and a resumption in student loan repayments.
“Investors should not be surprised that the consumer was spending in the final months of the summer. The real question is if the trend can continue in the coming quarters—and we think no,” Jeffrey Roach, chief economist at LPL Financial, said in a note.
A few experts are optimistic that the United States will not slip into a recession. There is a “large chance that the economy can achieve a soft landing … we expect the economy will muddle through the rest of 2023 and 2024 without sinking into a downturn,” said Tuan Nguyen, an economist at consultancy RSM, according to an Oct. 10 survey report by Bankrate.
However, Bankrate senior economic analyst Mark Hamrick sees a stronger chance of a recession hitting the United States.
“It is quite remarkable that we’ve gone close to two years now where we’ve been on high alert for a recession, and yet one has yet to materialize for the broader U.S. economy. Unfortunately, the odds of an economic contraction remain elevated,” he said.
