© Reuters. FILE PHOTO: A woman carries shopping bags during the holiday season in New York City, U.S., December 21, 2022. REUTERS/Eduardo Munoz/File Photo
By Lucia Mutikani
WASHINGTON (Reuters) -U.S. consumer confidence dropped to a four-month low in September, weighed down by persistent worries about higher prices and rising fears of a recession, though households remained generally upbeat about the labor market.
The second straight monthly decline in confidence reported by the Conference Board on Tuesday also reflected higher interest rates and concerns about the political environment as the nation faces a potentially disruptive shutdown of the federal government on Saturday amid political wrangling. Confidence fell across all age groups, and was most pronounced among consumers with household incomes of $50,000 or more.
“Overall confidence was lower than expected as a sharp drop in expectations, perhaps linked to the talk of a government shutdown, outweighed a slightly stronger appraisal of current conditions in September as households’ assessment of the labor market improved,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
The Conference Board said its consumer confidence index dropped to 103.0 this month, the lowest reading since May, from an upwardly revised 108.7 in August. Economists polled by Reuters had forecast the index easing to 105.5 from the previously reported 106.1. Consumers’ perceptions of the likelihood of a recession over the next year ticked back up.
A sharp decrease in the expectations measure accounted for the decline in confidence, which economists partially attributed to the looming government shutdown, with Congress so far failing to pass any spending bills to fund federal agency programs in the fiscal year starting on Oct. 1.
The shutdown will see hundreds of thousands of federal workers furloughed and a wide range of services, from economic data releases to nutrition benefits, suspended beginning on Sunday. The cutoff date for the preliminary survey was Sept. 18.
“Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular,” said Dana Peterson, chief economist at The Conference Board in Washington. “Consumers also expressed concerns about the political situation and higher interest rates.”
The Federal Reserve last week left its benchmark overnight interest rate unchanged at the 5.25%-5.50% range. The U.S. central bank, however, stiffened its hawkish stance, projecting another rate hike by year end and monetary policy staying significantly tighter through 2024 than previously expected.
The Fed has hiked the policy rate by 525 basis points since March 2022. Though consumers continued to fret over the higher cost of living, their inflation expectations over the next year remained stable and they showed no intentions of drastically pulling back on purchases of motor vehicles and other big-ticket items like television sets and refrigerators over the next six months.
Fewer, however, expected to buy a house, with the rate on the popular 30-year fixed-mortgage the highest in more than 22 years and home prices continuing to increases.
Consumers’ 12-month inflation expectations were unchanged at 5.7% for the third straight month.
Consumer spending remains underpinned by a tight labor market, which is keeping wage gains elevated.
The survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, widened to 27.3 this month compared to 26.7 in August. This measure correlates to the unemployment rate in the Labor Department’s closely followed employment report.
U.S. stocks were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
HOUSE PRICES ACCELERATE
A separate from the Commerce Department showed new home sales plunged 8.7% to a seasonally adjusted annual rate of 675,000 units in August. Economists had forecast new home sales, which account for a small share of U.S. home sales, falling to a rate of 700,000 units.
New home sales are counted at the signing of a contract, making them a leading indicator of the housing market. They, however, can be volatile on a month-to-month basis. Sales increased 5.8% on a year-on-year basis in August. Though new home sales remain supported by a dearth of previously owned homes on the market, the resurgence in mortgage rates is reducing affordability for many prospective home buyers.
The rate on the 30-year fixed mortgage vaulted above 7% in August and climbed to an average of 7.19% last week, the highest since July 2001, according to data from mortgage finance agency Freddie Mac. Mortgage rates are rising in tandem with U.S. Treasury yields, which have surged on worries that soaring oil prices could hamper the Fed’s fight against inflation.
“While we expect higher rates to hurt new home sales, we think they will be more resilient than existing home sales as builders seem willing to scale up their use of incentives to motivate sales,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.
A third report from the Federal Housing Finance Agency showed annual home price growth accelerated for a second straight month in July, largely reflecting the tight supply in the market for previously owned homes. House prices jumped 4.6% on a year-over-year basis in July after rising 3.2% in June. Prices shot up 0.8% month-on-month after advancing 0.4% in June.
The resurgence in house prices was seen feeding through to higher inflation, likely giving the Fed cover to maintain its hawkish posture for some time.
“The Fed will see the reacceleration of house prices as a reason to keep interest rates higher for longer,” said Bill Adams, chief economist at Comerica (NYSE:) Bank in Dallas. “Renting households are seeing some relief in new lease prices, but since two thirds of Americans are homeowners, the Fed cannot afford to look past house prices’ influence on the cost of living.”
