Consumer and Business Expectations for the Economy Remain Weak
- The National Federation of Independent Business (NFIB) Small Business Optimism Index fell for the third consecutive month, declining 0.9 points in January to 95.0, the lowest reading since May. The net share of firms expecting the economy to improve fell 7 percentage points to -23 percent, the lowest reading since November 2013. Likewise, the net share of firms expecting real sales to increase in the next six months fell 2 percentage points to -6 percent, while the percent of firms planning to increase employment was unchanged at 17 percent.
- The University of Michigan Consumer Sentiment Index declined 2.8 points to 76.2 in the preliminary February reading. The decline was driven by a sharp drop in consumer expectations, which fell 4.2 points to 69.8, the lowest level since August. The index for current economic conditions also fell, though by a more modest 0.5 points to 86.2. The expected inflation rate over the next year jumped three-tenths to 3.3 percent, the highest level since July 2014.
- From a year ago, the Consumer Price Index (CPI) rose 1.4 percent in January, unchanged from December, according to the Bureau of Labor Statistics. Energy prices fell 3.6 percent year-over-year, though this was much smaller than the decline of 7.0 percent seen the prior month. Core CPI (excluding energy and food prices) increased 1.4 percent annually, a deceleration of two-tenths from December.
- The Mortgage Bankers Association National Delinquency Survey (which counts loans in forbearance as delinquent) for Q4 2020 showed that for all mortgages, delinquencies fell nine-tenths to 6.7 percent. The overall mortgage market serious delinquency rate (90 or more days past due and mortgages in foreclosure) fell two-tenths to 5.0 percent, the second-highest level since the start of 2014. Serious delinquencies on Federal Housing Agency mortgages rose four-tenths to 11.2 percent, the highest level since the series began in 1979.
- Mortgage applications fell 4.1 percent for the week ending February 5, according to the Mortgage Bankers Association. Purchase applications dropped 4.7 percent, the largest weekly decline since the beginning of December. Refinance applications declined by 4.2 percent.
While the net share of firms expecting the economy to improve fell, as did consumer expectations in early Q1, we believe a faster-than-expected decline in COVID-19 cases and hospitalizations and a notable loosening in some states’ restrictions will likely mean stronger growth than we previously expected in Q1. Currently the most important determinant in the pace of recovery is the rollout and administration of vaccines. While concerns regarding inflation have risen due to the level of spending power held by many consumers, as well as the unprecedented levels of fiscal and monetary stimulus, the January CPI report showed no change in annual growth in the headline measure, as well as a deceleration in the core measure. However, inflation expectations increased in early February to a six-year high, and a significant rise in inflation could prompt the Federal Reserve to scale back its level of asset purchases. While the Fed has signaled a willingness to let inflation run above the target level in order to achieve “long-run average” inflation of 2 percent, it is not clear how long they would allow it to do so. In housing, while overall delinquencies declined, the serious delinquency rate was relatively unchanged. Purchase mortgage applications fell for the second time in the past three weeks, which could indicate a slower pace of sales in February and supports our expectation of a deceleration in residential investment in the first quarter of 2021.
Economic and Strategic Research Group
February 12, 2021
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