Consumers’ Expectations Eased in June

The Conference Board’s Consumer Confidence Index decreased in June, following an increase in May. The June decline in the Consumer Confidence Index was driven mainly by a sharp decline in the Expectations Index. While the Present Situation Index declined modestly, by 0.1% from an index reading of 161.2 in May to 161.1 in June, the Expectations Index dropped by 3.7% from 107.0 to 103.2 in June. As a result, and given that the Expectations Index accounts for 60% of the overall one, the Consumer Confidence Index decreased by 1.9% to 126.4 in June on a seasonally adjusted basis.

Consumer confidence seems to be a leading indicator of broader recessions. Both consumers’ confidence in the present and their expectations about the near future tend to dampen prior to a recession. However, the figure above indicates that just prior to the pre-recession declines in the Consumer Confidence Index and its components, the Present Situation Index peaks while the Expectations Index has flattened. This contributes to the growth in consumers’ confidence in the present situation (e.g. actual activity) over their expectations (e.g. potential activity), empirically an unsustainable situation.

In June, the gap between consumers’ expectations and their assessments of current situation, measured as the difference between the Expectations and Present Situation Indices that is then scaled by the Expectations Index, has widened and the Expectations Index was 56% below the reading on the Present Situation Index. Historically, the Expectations Index was 76% below the Present Situation Index in November 2007, 137% below the Present Situation Index in February 2001 and 36% below the Present Situation Index in April 1989, as shown in Figure 1 above. In addition, these three large gaps located very close to the beginning of the recession. The one in November 2007 happened one month before the 2008 recession; the one in February 2001 happened one month before the early 1990s recession, and the one in April 1989 was followed by the early 2000s recession with an about 14-month interval.

The Expectations Index, as one of the components of the Consumer Confidence Index, is based on responses to three questions in the survey, including respondents’ expectations regarding business conditions, employment conditions and their total family income in the coming six months. In June, the weakness in the Expectations Index largely reflected the weakness in expectations of business conditions and income. Over the month of June, expectations for business conditions worsened by 3.9% on net and expectations for total family income worsened by 3.3% on net, while expectations for employment conditions improved by 0.8% on net. The net calculation tracks the difference between expectations of improvement (“better”, “more jobs” or “increase”) and expectations of worsening (“worse”, “fewer jobs” or “decrease”) across the months (shown in Figure 2).

Instead of three questions, the Present Situation Index, as one of the components of the Consumer Confidence Index, is based on responses to two questions in the survey, including respondents’ appraisal of current business conditions and their appraisal of current employment conditions. Over the month of June, consumers’ appraisal of current business conditions worsened by 1.7% on net, and consumers’ assessment of current employment conditions worsened by 1.4% on net. In terms of current conditions, the net calculation tracks the difference between the good appraisal (“good” or “jobs plentiful”) and the bad appraisal (“bad” or “jobs hard to get”) across the months.

The Conference Board also reported the share of respondents planning to buy a home within six months. In June, there were 5.9% of respondents planning to buy a home within six months, up from the 5.5% in May. The increase in the share of respondents planning to buy a home within six months reflects the increase in both the share of respondents planning to buy a new home and the share of respondents who were “uncertain” whether they would buy a new home or an existing home within six months.

The share of respondents planning to buy a new home within six months rose to 1.2% in June. After reaching 1.5% in April, the share of respondents planning to buy a new home within six months declined to 1.0% in May and rebounded a little bit this month. As shown in Figure 3 above, despite the monthly volatility, the underlying trend in the share of respondents planning to buy a new home within six months has been moving upward since 2012.



Tags: , , , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: