Summary
Inflation may be slowing, but consumers remain downbeat about the future. A 5.6 point drop in expectations caused the Consumer Confidence Index to slip in January, and the gap between current and coming conditions speaks to consumers' fear of recession.
Confidence Gap Shows Recession Fear
Consumer optimism remained under pressure in January. The Consumer Confidence Index slipped to 107.1, which is above the prior six-month pace of 103.7 but still well-below the levels that prevailed pre-pandemic. There are a number of cross currents impacting consumer perceptions today, but the gap between consumers' views of current and coming conditions remains particularly wide and emphasizes consumers' fear of recession (chart).
Views on current conditions improved, with the present situation index rising to 150.9, or the highest reading in nine months (chart). This improvement likely reflects some recent reprieve in inflation as well as a still-tight labor market, but at the same time expectations about the future slumped. The expectations index slipped 5.6 points in January, or by the most in seven months to 77.8. All major expectation measures deteriorated compared to December; consumers expect business conditions to worsen, there to be fewer jobs and decreased income over the next six months. That said, all of these measures remain higher than they were a year ago. The press release accompanying today's report also noted that confidence fell the most for lower-income and younger households. The same groups who faced the toughest inflation environment over the past year and are relying the most on credit to spend today.
Another factor that may have contributed to the drop in January expectations is increased concern over the debt ceiling. The cutoff date for the survey was January 24, just after the debt ceiling really came into focus. The closer the nation comes to passing the X date, or date at which the Treasury would be unable to meet all of its obligations on time, which we estimate to be around early August, the more we are likely to see confidence slip. For example, as seen in the nearby chart, confidence weakened significantly in August 2011, or the closest brush the United States has come with the X date. Specifically, the expectations index slipped 22.5 points in that one month alone.
Still Favorable Labor Market Views
Despite increased pessimism, consumers still view the labor market favorably. 48.2% of consumers reported jobs as plentiful in January, up 1.8 percentage points from December, and the share viewing jobs as hard to get fell to 11.3%. The difference between the two, known as the labor differential, is now the widest it has been in five months and suggests consumers are still confident in their job prospects (chart). In other words, while labor market slack is starting to materialize, it has yet to significantly weigh on consumers' perceptions. The upside here is that a still-strong labor market amid slowing inflation is providing support for real income growth.
Still, consumers' staying power is showing signs of breaking. Last week we learned real personal spending slid 0.2% in December amid a pullback in durables consumption specifically. With demand for these purchases largely pulled forward during the pandemic and higher rates leading to increased financing costs today, we expect a continued pullback in demand for these traditionally big-ticket items. The January confidence data supports that view as well with consumer purchasing plans remaining depressed. Plans to purchase a new car in the next six months fell to 2.9%, while those expecting to purchase a home also declined. Purchase plans of other major household appliances were more mixed but remain near low levels. Tighter financial conditions are beginning to put consumers' staying power to the test.