U.S. consumer confidence unexpectedly improved in May after a three-month decline. This recovery was driven by optimism about the labor market, though worries about persistent inflation and expectations of higher interest rates remained.
The mixed survey results from the Conference Board revealed a complicated picture. While more consumers believed the economy could slip into recession in the next 12 months, they were also very positive about the stock market and planned to increase major household purchases over the next six months.
Despite the expected slowdown in economic growth due to the Federal Reserve‘s interest rate hikes, economists and business leaders do not foresee a full-blown recession. Oren Klachkin, a financial market economist at Nationwide, noted that “continued positive job growth, rising wages, an ebullient stock market and healthy household balance sheets will keep consumers spending despite elevated prices and borrowing costs.”
Read more: U.S. annual inflation slows to 3.4 percent in April, monthly CPI up 0.3 percent
Rising inflation expectations
The Conference Board’s consumer confidence index rose to 102.0 this month, up from an upwardly revised 97.5 in April. This outperformed the University of Michigan’s sentiment index, though confidence remains within a relatively narrow range it has maintained for over two years.
Consumers’ perceptions of the labor market also improved, with the survey’s “labor market differential” widening. This metric, derived from respondents’ views on job availability, suggests that while opportunities may not be as abundant as in the past year, the labor market remains resilient, with historically low layoffs underpinning the economic expansion.
However, consumers’ 12-month inflation expectations rose to 5.4 percent from 5.3 percent in April, reflecting the surge in price pressures experienced in the first quarter. This, combined with still-solid economic growth, has prompted financial markets to push back expectations for the first rate cut from the U.S. Federal Reserve to September from June.
Shifts in purchasing plans
Despite concerns about higher prices and a potential economic downturn, consumers are not planning to significantly curtail their spending. The survey’s measure of buying plans for major appliances over the next six months rose, driven by increased demand for items like televisions, refrigerators, vacuum cleaners, and clothes dryers.
Buying plans for motor vehicles remained unchanged, while those for houses declined amid higher mortgage rates and elevated home prices. On a six-month moving average basis, purchasing plans for homes were unchanged in May at their lowest level since August 2012.
Housing market slowdown
A separate report from the Federal Housing Finance Agency showed that house prices increased 6.7 percent in March on a year-over-year basis, down from a 7.1 percent rise in February. This price growth is being driven by a shortage of homes available for sale, and housing costs have been a significant contributor to overall inflation.
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