U.S. consumer confidence dropped to a 16-month low in June
as worries about high inflation left consumers to anticipate that the economy
would slow significantly or even slide into recession in the second half of the
year.
Despite the gloomy outlook, consumers showed little sign of
cutting back on spending, with buying plans for motor vehicles and other big
ticket items like refrigerators and washing machines increasing, the survey
from the Conference Board on Tuesday showed. But fewer consumers compared to
April intended to go away on vacation at home or abroad, reflecting record high
gasoline prices and expensive airfares.
The economy is on recession watch as the Federal Reserve
aggressively tightens monetary policy to tackle inflation. For now, it
continues to grow, with other data on Tuesday showing the goods trade deficit
again narrowing significantly in May as exports hit a record high.
"Right now we are at an inflection point in the
economy, where actual spending and economic activity is still positive,
however, consumer confidence and financial conditions, especially interest
rates, are indicating a slowdown ahead," said Chris Zaccarelli, chief
investment officer at Independent Advisor Alliance in Charlotte, North
Carolina.
The Conference Board's consumer confidence index dropped 4.5
points to a reading of 98.7 this month, the lowest since February 2021.
Consumers' assessment of current business and labor market conditions were
little changed. But their short-term outlook for income, business and labor
market conditions were the weakest since March 2013, which the Conference Board
said were "suggesting weaker growth in the second half of 2022 as well as growing
risk of recession by year end."
Consumer fears of a recession could become self-fulfilling.
The University of Michigan's survey last week showed consumer sentiment
plunging to a record low in June.
The Conference Board survey places more emphasis on the
labor market, which remains tight, but consumers are feeling the inflation
pain. National gasoline prices averaged just above $5 per gallon for most of
June, before slipping back to around $4.88 per gallon as of Tuesday, according
to data from AAA.
"Consumers hate inflation and this is depressing
consumer confidence via the expectation channel even as households see labor
market conditions as strong," said Conrad DeQuadros, senior economic
advisor at Brean Capital in New York.
The Conference Board survey's so-called labor market
differential, derived from data on respondents' views on whether jobs are
plentiful or hard to get, ticked up to 39.7 from a reading of 39.5 in May. This
measure correlates to the unemployment rate from the Labor Department.
There were 11.4 million job openings at the end of April,
with nearly 2 openings per every unemployed person.
Stocks on Wall Street were mostly lower. The dollar rose
against a basket of currencies. U.S. Treasury prices fell.
INFLATION EXPECTATIONS JUMP
Consumers' inflation expectations over the next 12 months
jumped to a record high 8.0% from 7.5% in May.
The Fed this month raised its policy rate by three-quarters
of a percentage point, its biggest hike since 1994. The U.S. central bank has
increased its benchmark overnight interest rate by 150 basis points since
March.
Consumers still intend to keep on spending on goods even as
they worry about inflation. The share of consumers planning to buy a motor
vehicle over the next six months rose. More consumers planned to buy major
household appliances, including dryers and vacuum cleaners.
But vacation is not on the cards for many, which could slow
consumer spending and economic growth in the second half.
Plans to buy a home were unchanged as borrowing costs
increase further and house prices remain elevated amid a shortage of
entry-level homes.
A separate report on Tuesday showed the S&P CoreLogic
Case-Shiller national home price index increased 20.4% on a year-on-year basis
in April after surging a record 20.6% in March. Hefty price gains were recorded
in Tampa, Miami and Phoenix.
Signs that house price inflation has probably peaked were
reinforced by a third report from the Federal Housing Finance Agency showing
home prices increased 18.8% in the 12 months through April after accelerating
19.1% in March.
Nevertheless, the economy is chugging along. A fourth report
from the Commerce Department showed the goods trade deficit contracted 2.2% to
$104.3 billion in May, suggesting that trade could contribute to economic
growth this quarter for the first time in nearly two years. read more
A record trade deficit weighed on the economy in the first
quarter, resulting in gross domestic product declining at a 1.5% annualized
rate. Trade has subtracted from GDP for seven straight quarters. Growth
estimates for the second quarter range from as low as a 0.3% rate to as high as
a 2.9% pace.
Wholesale inventories increased 2.0% in May, while stocks at
retailers climbed 1.1%.
"Exports and inventories are still rising in May at
least, and this means the recession clouds offshore will have to sit on the
horizon for another month," said Christopher Rupkey, chief economist at
FWDBONDS in New York.
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