A fluctuating housing market, sky-high oil prices, rising inflation, and concerns over the labor market and earnings growth are all potential factors in the drop in Consumer Confidence in May. Released monthly by the Conference Board, the Consumer Confidence Index measures everything from consumer outlook on business conditions to expectations of individual purchases of homes, cars, and appliances.
Two main components of the Consumer Confidence survey query consumers on how they feel about current economic conditions and how they feel about conditions in the upcoming six months. The Present Situation Index declined slightly in May, but at 132.5 is not far off April's peak of 136.2 that marked the highest level since August 2001. The Present Situation Index sits at a level well above the five-year average of 101.4. Conversely, the Expectations Index has been under the 100 mark since January 2005 and doesn't seem likely to break into triple digits anytime soon. The Index fell to 83.7 in May, well below the five-year average of 91.7. The deficit between these two component indices has grown to its widest point in more than four and a half years. In other words, consumers seem optimistic about current conditions, but the economic risk factors prevalent today have caused a significant amount of uncertainty about what is to come.
The Conference Board also asks consumers about their home-purchase plans. The percentage of consumers planning to purchase a home peaked in March 2004 at 4.2 percent and now sits at 2.8 percent. A spike in March 2006 to 4.1 percent shows that results from this survey question can be volatile, but apart from that March anomaly the percentage of those planning to purchase a home has been in the neighborhood of 3 percent since the end of last year. While well below peak, this number is somewhat encouraging should it continue to hold near this level in the coming months.
The average consumer is not the only concerned party when it comes to the economy; many housing industry analysts and economists are worried as well, especially given some recent inflation figures. In May, the Department of Labor released April Consumer Price Index figures that were markedly higher than expected, sending the Dow Jones Industrial Average on a 200-point tumble that represented the largest single-day drop in three years. The inflation news was significant in this release due to the upward change in the core index, which strips out the more volatile food and energy costs. In prior months, this core index had remained relatively unchanged, but the latest increase suggests that persistently high fuel costs, which up until recently have seemingly had a limited effect on core inflation, appear to finally be leaching into other areas of the economy. With inflation data starting to look more threatening, interest rate hikes from the Fed have a higher probability of continuing. This will likely impact the housing market as higher interest rates lead to higher mortgage rates, which are already contributing to home buyer uncertainty.
While it is important to keep risk factors such as inflation and cautious consumer psychology in mind when examining the business landscape, it is equally important not to overreact to a small handful of indicators. For all its troubles, the economy is doing fairly well overall, with GDP growth remaining moderately strong and job gains persisting month after month. So long as inflation does not rise too uncontrollably and mortgage rates do not spike too suddenly, the fundamental strength of the economy should take the housing market toward a steadier equilibrium by year's end. —Jonathan Dienhart heads the Published Research Group for Hanley Wood Market Intelligence, a division of PROSALES' parent company, Hanley Wood, LLC.
Hanley Wood Market Intelligence provides data and consulting services on residential real estate development and new-home construction, including analysis of key trends impacting the housing market through its proprietary software products and research reports. Contact: 800.639.3777. www.hanleywood.com/hwmi.