KEY DATA: Confidence: -11.3 points; Current: -9.9 points; Expectations: -12.4 points/ Case-Shiller National Prices: +2.2%; Over-Year: +18.6%/ FHFA Prices: +1.6%; Over-Year: +18.8%
IN A NUTSHELL: “Confidence is faltering and that raises some questions about the strength of the recovery going forward.”
WHAT IT MEANS: What me worry? Well, yes. That seems to be the verdict, as the Conference Board’s Consumer Confidence Index tumbled in a sharp manner that mirrors what we saw in the University of Michigan’s Consumer Sentiment report. The difference is that there the Michigan Sentiment number was even lower than the pandemic bottom reached in April 2020, while the Confidence Board’s Confidence level was still well above the low. As was the case with the Michigan report, both the current conditions and expectations indices tanked. In addition, household views about both the business situation and the labor markets, in the present and the future, were off solidly. Household concern is rising sharply and if those worries persist, we could see some scaling back of spending.
On the housing front, prices seem to know no upper bound. Both the Case-Shiller and Federal Housing Finance Agency home price indices rose sharply in June. Over-the-year, both surged over 18.5%, an enormous increase, and the price gains are accelerating. Is that sustainable? Do you think that increases of 29.3% in Phoenix, 27.1% in San Diego and 25% in Seattle are sustainable? Only three of the twenty large metro areas in the report posted over-the-year increases less than sixteen percent while eleven had price gains in over nineteen percent. Can you say bubble? If not, I will.
IMPLICATIONS: Confidence is falling, despite strong gains in jobs, solid increases in wages, and large declines in the unemployment rate.So, why are households feeling so uncertain? The only logical reason is the rapid spread of the Delta variant and the worries that a major slowdown could occur. That raises questions about using the confidence data to forecast consumer spending. Usually, spending changes follow confidence changes when the source of the disturbance is related to economic factors. While the Conference Boards measure about current and future jobs and business activity did decline in August, their levels are not signaling any major slowdown. But the reports do raise the warning flag that if the pandemic worsens, and given the continued unwillingness of many to get vaccinated that is a real possibility, we could see people stashing away funds just in case. That would mean at least a short-term easing in demand. In addition, there’s the housing bubble. The National Association of Realtors Housing Affordability Index is down nearly 16% over the year. It is not just new buyers who are being priced out of the market, but current owners as well. Those high prices may not be sustained. Residential investment was a drag on the economy in the spring and it could continue slowing growth for some quarters to come. If the pandemic leads not only to a drop in confidence, but also an unwillingness to go into stores and restaurants again, then consumption could falter as well. We could see growth moderate faster than expected. Which raises the question: When it comes to tapering, is the Fed behind the curve? If you believe Chair Powell, the answer is no. If you believe several the Fed Bank presidents, the answer is yes.Today’s numbers only confound the issue as they imply a slowdown in the future, which doesn’t help a data-dependent Fed.The next FOMC meeting on September 21,22 could be very interesting.