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Consumer confidence increased in March, but inflation still remains a threat

March 29, 2022 Blog 2 min read
Authors:
Jim Baird Wealth Management

Strong labor market conditions remain supportive of the collective mood of consumers, but there’s also a growing wariness about the near-term direction of the economy.

Consumer Confidence Index chart

The Conference Board’s measure of consumer confidence edged higher to 107.2 in March, coming in roughly in line with expectations. The uptick broke the trend of consecutive declines since December. The improvement was in part a result of downward revisions to the February index reading, which was trimmed to 105.7 from a previously reported 110.5.

As has typically been the case in recent years, consumers were much more optimistic about the current state of the economy than its near-term direction. The Present Situation index surged to 153.0 from 143.0 in February. The current strength of the labor market is a key catalyst for consumer optimism about the state of the economy. A majority of respondents (57.2%) acknowledged that jobs were readily available — a new record — with less than 10% indicating that jobs are hard to find. From low unemployment and layoffs to near-record job openings, virtually any measure of the labor market points to strength.

Conversely, consumers are increasingly wary of the outlook for later this year, confirmed by the drop in the Expectations Index from 80.8 in February to 76.6 in March. The economy is already slowing, while inflation risk and expectations for higher interest rates and tighter financial conditions ahead are concerning developments that impact every household to varying degrees.

While the full impact of interest rate increases can take a year to be fully absorbed, some of the effects are already being felt, even as policymakers have opened the door for more aggressive increases in the coming months. The fixed rate on a 30-year mortgage is now north of 4%, well over 100 basis points (1.0%) higher than at the start of the year. Coupled with surging home prices, higher borrowing costs are already starting to dampen housing demand. Existing home sales in February dropped to their lowest level since last August.

Despite above-average wage gains, the corrosive effects of inflation are impossible for households to overlook, as their spending power is eroded by higher prices across the spectrum of goods and services. Lower-income households and those on a fixed budget are particularly feeling the pinch, as their ability to spend on discretionary items is diminished.

Growing concerns about the near-term outlook over the past few months have been warranted, given a heightened level of inflation, rising interest rates, and a war in Eastern Europe that introduces a significant degree of geopolitical uncertainty and potential repercussions that could ripple for some time. The cone of potential outcomes remains wide, but it isn’t unreasonable to envision a situation in which geopolitical conflict eases, supply chains untangle, prices cool off, and relative stability is restored to the market. Until there is greater clarity though, a more cautious outlook is to be expected.

The bottom line? The widespread availability of jobs and rising household incomes are strongly supportive of consumers, but the persistent — and still growing — threat of inflation looms large. As the Fed embarks on what appears likely to be an extended rate hike cycle and financial conditions tighten, consumers are increasingly wary of the outlook for the economy in the latter half of the year and into 2023. Can policymakers thread the needle to cool the economy and bring down inflation pressures to a more palatable level without choking off growth? That’s the challenge before the Fed and a tall order for policymakers who will attempt to navigate the economy to a soft landing.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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