March Consumer Sentiment and February Pending Home Sales

KEY DATA: Sentiment: -3.4 points; Current Conditions: -1 point; Expectations: -5.1 points/ Pending Sales (Monthly): -4.1%; Over-Year: -5.4%  

IN A NUTSHELL: “Consumer pessimism about the future is rising and that does not bode well for spending and overall economic growth.”

WHAT IT MEANS:  Prices are soaring, supplies are limited, and income growth is faltering.  Should anyone be surprised that households are losing faith in the future? No. The University of Michigan’s Consumer Sentiment Index fell in March to its lowest level since August 2011.  While the view of current conditions eased modestly, there was a sharp decline in expectations of the future.  Respondents are concerned about inflation and its impact on their financial situation.  As the reported stated, “more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past fifty years”.  Dimming views of the future, despite rising wages, raises serious questions about whether households will keep spending at the pace we have been seeing. 

Home sales are being constrained by a lack of inventory and the easing in purchases is likely to continue.  The National Association of Realtors’ Pending Home Sales Index dropped solidly in February, and that was before mortgage rates surged. Contract signings were up only in the Northeast, but that is where sales had tumbled the greatest.  Pending home sales were down over nine percent since February 2021in that part of the country. The drop in home sales is a real concern, not just because home construction is such an important sector. Sales of homes generally are followed in the year after by added demand for housing-related products, especially when it comes to existing homes.     

IMPLICATIONS:  Economic growth this year will depend greatly on the extent that inflation can be brought under control.  Business leaders may talk all they want about labor shortages and the need to raise wages much more sharply than in decades, but for consumers, it is all about spending power.  If inflation eats up all and more of the rising income, the ability to buy goods declines.  And that is what is happening.  The second potential impact of high inflation is deteriorating confidence and we are seeing that as well. The cutbacks in government stimulus monies have helped keep demand under control, but that hasn’t stopped businesses from grabbing for all the gusto they can.  Whether it is the local electrician, who claimed his prices were so high because it cost so much to fill up his pick-up (that really happened to me), to the manufacturer or retailer who thinks consumers will pay anything for their product, inflation is beginning to get out of control.  Monetary policy works with a lag and rates are so low that the Fed has a long way to go before interest rates start restraining demand enough that firms begin to think they cannot keep raising prices whenever and by whatever they want.  And it is not as if the Fed started off raising rates robustly.  With the Russian invasion creating more problems for the global supply chain, it doesn’t look as if inflation will moderate significantly for an extended period. 

Comment on Gasoline Tax Holiday: There is a lot of talk about helping drivers cope with the high price of gasoline by implementing a temporary gas-tax holiday.  Unfortunately, that is more a political move to “not just stand there but do something” than an effective way to ease the pain.  Some economists argue that the tax cut would largely wind up in the hands of producers and retailers, as they can raise prices to offset the tax reduction.  Others argue it would benefit consumers, but admit that not all of the tax cut would wind up in consumers’ wallets. Indeed, even the conservative think tank, the Cato Institute, noted in a recent piece that “forthe U.S. as a whole, consumers and producers … would share the benefits of a tax reduction equally.”  Yes, to some extent, drivers would see gasoline costs drop, but producers and retailers could take a significant share of the tax reduction and widen their margins, while governments would lose revenue needed to fund infrastructure investment by the total decline in taxes.  Lowering the tax would be a very inefficient way to help people in need right now and potentially have long-run negative implications.