Skip to main content
Economic & Housing Weekly Note

Consumer and Business Sentiment Rise, but Uncertainty Remains

June 12, 2020


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.

Forecast Impact

The historic decline in household and nonprofit net worth in the first quarter highlights the significant disruption caused by the coronavirus, as states and businesses shut down and equity markets fell sharply alongside a near full-stop in economic activity. However, the potential for an economic rebound remains. The FOMC has stated it has no plans to raise the federal funds target rate through at least 2022 and will continue to purchase assets to encourage growth. The increase in the share of firms expecting the economy to improve is likely due to the staggered reopening process across the country, though the underlying details show that doubts remain about the willingness of consumers to go out and spend. While consumer sentiment rose for the second month in June, almost half of respondents expected a renewed downturn either due to a second wave of the coronavirus or because of the longer-term impacts of high unemployment, which suggests that many consumers may be reluctant to go out and make big-ticket purchases. However, with the increase in savings observed recently, we believe consumers will have the capacity to increase their spending and accelerate a potential rebound if confidence improves further. The continued increase in purchase mortgage applications suggests that much of the typical spring homebuying season has been pushed into summer, which will likely lead us to increase our sales outlook for the third quarter. However, this increase is unlikely to last as inventories and new for-sale listings remain suppressed, along with the lingering effects of economic uncertainty and high levels of unemployment.

Consumer and Business Sentiment Increase as the Economy Begin to Reopen


Energy Prices Continue to Drag on Headline Inflation

Economic and Strategic Research Group 

June 12, 2020

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views, including assumptions about the duration and magnitude of shutdowns and social distancing, could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.