Consumer confidence rises in June to its highest point since early 2022

The Conference Board Consumer Confidence Index rose to 109.7 in June, up solidly from 102.5 in May while easily surpassing the consensus forecast for 103.5. The surprising increase lifted the index to its highest point since January 2022.

The relative strength of the report was evident in the breadth of improvement in its underlying components. The Present Situation Index and Expectations Index both posted marked improvement from the prior month, indicating that consumers are not only more upbeat in their assessment of the current state of the economy, but also less pessimistic about its near-term prospects. Even so, the Expectations Index remains narrowly below the threshold typically associated with a recession in the coming year.

The continued strength of the labor market has been a key positive catalyst for the collective mood. Despite rising layoffs and increasing unemployment claims this year, labor market conditions remain constructive, with job creation still solidly positive and a steady supply of job openings. Wage gains have moderated but remain elevated as the competition for labor in a tight labor market persists.

Consumers are also taking note of indications that inflation pressures are subsiding, with the survey’s 12-month inflation expectation easing to its lowest level since December 2020. Inflation expectations remain elevated — and justifiably so — but it appears that consumers continue to buy into the narrative that the inflation surge of the past few years is still largely a temporary phenomenon. The experience may not have been as “transitory” as was initially hoped or believed, but there’s at least a sense that the worst is now in the rearview mirror.

Additionally, it appears the combination of falling inflation and resilient labor markets is contributing to a growing belief that a recession could be avoided and that a soft landing may still be possible. Despite aggressive Fed tightening, consumers have continued to spend, fueled by solid wage growth, a deep reservoir of cash accumulated since 2020, and by tapping credit. That’s been the crucial growth engine to push the economy forward — albeit at a slower pace — despite the direct efforts of the Fed to cool it down.

The fact that consumer spending growth has persisted in the face of aggressive Fed tightening reflects the fact that households are broadly still on a solid financial footing, demonstrating both an ability and willingness to spend even in the face of a clear slowdown in the economy and potential recession on the horizon.

The big question revolves around the degree to which the Fed’s rate hikes have not yet been fully absorbed into the economy or felt by consumers. The long and variable lag still exists, and there’s a strong likelihood the interest rate increases of the past will become increasingly apparent in pushing back against positive economic momentum in the coming quarters. How much and how soon remains to be seen.

The bottom line? Consumers have picked themselves up off the mat, having absorbed several body blows in recent years — most recently in the form of surging inflation and aggressive Fed tightening. The worst of the inflation scare appears to be behind us, but the delayed effect of prior rate hikes and indications that the Fed isn’t done yet means that the economy will have to absorb some additional punches in the latter half of the year. For now, though, consumers are still standing.

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