U.S. Consumer Confidence Edges Down In May; House Prices Soar In March

U.S. consumer confidence eased modestly in May as persistently high inflation and rising interest rates force Americans to become more cautious about buying big ticket items, including motor vehicles and houses, which could curtail economic growth.

The survey from the Conference Board on Tuesday also showed consumers' perceptions of the labor market softening a bit this month. Though the drop in confidence was small, it suggested that the Federal Reserve's aggressive monetary policy actions to slow demand were starting to have an impact.

"We can never underestimate the U.S. consumer," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. "But plans to pull back on purchases, and become a little more cautious, is something that the Federal Reserve would welcome as it aims to cool demand."

The Conference Board's consumer confidence index slipped to a reading of 106.4 this month. Data for April was revised higher to show the index at 108.6 instead of the previously reported reading of 107.3. The index remains above its pandemic lows.

The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, fell to 39.3 this month from a reading of 44.7 in April. This measure correlates to the unemployment rate from the Labor Department. On face value it suggests that the jobless probably ticked up from a two-year low of 3.6% in April.

Despite consumers' somewhat unfavorable perceptions, the labor market is tightening, with the Conference Board noting that "they do expect labor market conditions to remain relatively strong, which should continue to support confidence in the short run." There were a record 11.5 million job openings on the last day of March.

U.S. stocks were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell. (Graphic: Consumer confidence,

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INFLATION PEAKED

Consumers' inflation expectations over the next 12 months dipped to 7.4% from 7.5% in April. That fits in with economists' views that inflation has likely peaked.

The Fed has increased its policy interest rate by 75 basis points since March. The U.S. central bank is expected to hike the overnight rate by half a percentage point at each of its next meetings in June and in July.

With prices still high and borrowing costs rising, consumers are reassessing their spending plans. The share of consumers planning to buy a motor vehicle over the next six months dipped. Fewer consumers intended to buy major household appliances like refrigerators, washing machines, dryers and television sets.

But the buying plans remained at levels sufficient to keep consumer spending growing and the overall economy expanding. Rising interest rates and the accompanying tightening in financial conditions have left Americans worried about an imminent recession.

"The economy will most likely avoid a recession in the near term as the Fed successfully navigates a 'softish' landing," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.

Consumers were also less inclined to buy a house as rising mortgage rates and record house prices reduced affordability.

A separate report on Tuesday showed the S&P CoreLogic Case-Shiller 20 metropolitan area home price index surged a record 21.2% on a year-on-year basis in March after increasing 20.3% in February. Tight inventory, especially of previously owned houses, is driving house prices.

Strong house price inflation was reinforced by another report from the Federal Housing Finance Agency showing home prices increased 19% in the 12 months through March after rising 19.3% in February. (Graphic: Case Shiller,

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With demand slowing, house price inflation will cool down.

"House price gains will be far more modest from here," said Matthew Pointon, senior property economist at Capital Economics in New York. "We expect annual growth to slow to zero by mid-2023."