Economic Indicators: Consumer Sentiment Still Riding High

Despite negative signals in several areas of the economy, consumers remain optimistic about the overall outlook. The University of Michigan’s Index of Consumer Sentiment rose to its highest value in more than a decade. Both components comprising the index — their current conditions assessment and their view of the future — rose in October, and following the usual pattern, expectations for the future rose more sharply.

Consumers expect the current economic expansion to continue and do not foresee an economic downturn in the near future. Interestingly, they expect low inflation and small increases in interest rates.

But consumer prices actually rose at a faster rate in September: they were half a percentage point higher (+0.5%) than the previous month, bringing price inflation to 2.2% over the last year. The Consumer Price Index (CPI) has risen at a faster rate each month over the last quarter. Most of the increases have been driven by increases in energy or food prices.

The inflation rate excluding food and energy, shown by the red line in the chart above, has been increasing at a stable rate of 1.7% in the last five months. This is the index that economists usually rely on as an indicator of “core” inflation. Economists typically view this as an indication that inflation is not getting any worse, even though consumers are still seeing a 2.2% increase in prices.

September retail sales increased by 1.6%, which is a slightly lower pace than the previous month, when sales rose by a robust 3.5%. Compared to a year ago, retail sales are 4.4% higher.

Further, sales at building-materials stores rose faster than overall retail sales. They were 2.1% above August, compared to the 1.6% for total sales cited above. Building-materials stores’ sales were a remarkably strong 10% above last year.

On the other hand, sales at appliance stores continue to fall. In August, the latest month for which we have data, sales fell by another 14.3%. This is the third consecutive double-digit decline in sales compared to the prior year. But as NKBA has observed, this doesn’t necessarily signal that sales of appliances are falling; rather, it is sales at traditional “appliance stores” that are in decline, as appliances like washers, dryers, refrigerators and dishwashers are selling at home centers like Home Depot and Lowe’s.

And interest rates continue to rise, albeit at a slow pace. Last week the average 30-year fixed mortgage rate rose by six basis points (0.06%) to 3.91%. Although this may seem like a negligible increase, we should note that this is an average over all loans executed during the week. Some consumers are in fact paying a rate higher than this average, and a small increase may price them out of the housing market.

Economists as a whole expect interest rates to rise over the next year, although very few project increases more than a half a percentage point. The expectation is that the Federal Reserve Bank will make only two or three interest moves over the next 12 months.

Manuel Gutierrez, Consulting Economist to NKBA

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single-Family Starts. This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing-Home Sales. These data are issued monthly by the National Association of Realtors, and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $750,000 and higher. The data are released quarterly by the U.S. Department of Commerce, and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers, for instance.

We hope that you find this dashboard useful as a general guide to the state of our industry. Please contact us if you would like to see further detail.