Consumer and Business Sentiment Rise, but Uncertainty Remains

Key Takeaways:

• The Federal Open Market Committee (FOMC) kept the target rate for the federal funds rate unchanged at 0.0-to-0.25 percent at its June 9-10 meeting. The FOMC’s statement remained downbeat about the coronavirus’ impact on economic growth, and it announced that it would continue asset purchases, putting a floor at $80 billion in Treasuries and $40 billion in mortgage-backed securities a month. The FOMC also released economic projections for the first time since December showing that the federal funds rate will likely remain unchanged at the zero-lower bound through at least 2022 and inflation will not rise to the symmetric two-percent target by 2022, a stark change from the December projections.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index rose 3.5 points in May to 94.4. The net share of firms expecting the economy to improve rose 5 percentage points to 34 percent, the highest level since August 2018. However, poor sales remained the single most important problem for the second straight month, and the net share of businesses expecting higher real sales in the next six months was negative 24 percent.
• The Consumer Price Index (CPI) fell 0.1 percent in May following a 0.8 percent drop in April, the third consecutive month of decline. Energy prices fell 1.8 percent, the fifth straight monthly decline. Core CPI also edged down one-tenth. From a year ago, headline CPI rose just 0.1 percent, the slowest annual pace of growth since September 2015. Core CPI rose 1.2 percent from a year ago, the slowest annual pace of growth in just over nine years.
• Import prices rose 1.0 percent in May, the first increase since January, driven by a 21.7 percent increase in petroleum prices. However, compared to a year ago, both import and export prices were down around 6.0 percent.
• The University of Michigan Consumer Sentiment Index jumped 6.6 points to 78.9 in the preliminary June reading, the largest increase since November 2016. Both the current economic conditions and expectations components rose, increasing 5.5 points and 7.2 points, respectively. However, according to the press release, two-thirds of all surveyed consumers expect “bad times financially [and] in the economy as a whole during the year ahead.”
• U.S. household and nonprofit organization net worth — the value of assets minus liabilities — posted the largest decline since the series began in 1952, according to the Federal Reserve. The decline was led by a steep drop in corporate equity wealth, which fell $4.8 trillion, also the largest decline since the series began. Savings deposits increased by almost $380 billion, the largest increase ever. Owners’ equity in real estate rose solidly, and owners’ equity in real estate as a percentage of household real estate value increased to 64.8 percent, the highest level in 29 years. Single-family mortgage debt outstanding rose to $11.2 trillion, the highest level since Q3 2008.
• Mortgage applications rose 9.3 percent for the week ending June 5, according to the Mortgage Bankers Association. Purchase applications grew 5.3 percent, the eighth consecutive week of increase. Refinance applications jumped 11.4 percent. From a year ago, purchase and refinance applications were up 12 percent and 80.4 percent, respectively.