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Economic & Housing Weekly Note

Consumer Sentiment Jumps on Vaccine Hopes and Further Stimulus

March 12, 2021

Key Takeaways:

  • The University of Michigan Consumer Sentiment Index jumped 6.2 points in the preliminary March reading to 83.0, the highest level in a year. The current economic conditions index increased to the highest level in a year as well, while the index of consumer expectations increased to the highest since October. The expected inflation rate over the next year fell two-tenths to 3.1 percent.
  • The National Federation of Independent Business (NFIB) Small Business Optimism Index rose eight-tenths to 95.8 in February, the first increase since September. The share of firms planning on increasing employment and planning on making capital outlays each increased by 1 percentage point to 18 percent and 23 percent, respectively. The share of firms expecting the economy to improve increased, though remained a net negative, while the share of firms expecting real sales to increase fell further to a net negative 8.0 percent.
  • From a year ago, the Consumer Price Index (CPI) increased 1.7 percent in February, an acceleration of three-tenths from January, and the fastest annual pace of growth in a year according to the Bureau of Labor Statistics. Energy prices increased 2.4 percent from a year ago after falling 3.6 percent in January. Core CPI (excluding energy and food prices) decelerated by one-tenth to 1.3 percent from a year ago.
  • U.S. household and nonprofit organization net worth—the value of assets minus liabilities—increased by $6.9 trillion in the fourth quarter to a record $130.2 trillion, according to the Federal Reserve. Approximately half of this growth was concentrated in corporate equities. Assets held in checking accounts and currency increased by $1.1 trillion, the largest increase on record. Owners’ equity in real estate jumped by the largest amount on record, while owners’ equity in real estate as a percentage of household real estate value increased four-tenths to 65.9 percent, the highest level since Q3 1990. Single-family mortgage debt outstanding rose $156.6 billion to $11.7 trillion (nominal), a record high and the second largest increase in 13 years.
  • Mortgage applications fell 1.3 percent for the week ending March 5, according to the Mortgage Bankers Association. Purchase applications jumped 7.2 percent, the largest weekly increase since early January. Refinance applications declined 5.0 percent, the fifth decline in the last seven weeks.
Forecast Impact:

Despite the small increase in February business optimism, the continual net negative in the share of firms expecting the economy to improve highlights the difficulties faced by many small businesses across the country. As the NFIB press release states, “[t]he economic recovery remains uneven for small businesses, especially those still managing state and local regulations and restrictions.” However, while small businesses remain worried, consumer sentiment appears to be picking up as vaccines become more widely available, new COVID-19 cases drop, and hopes for further stimulus increase. Along with the rise in consumer sentiment, the increase in household/nonprofit net worth in the fourth quarter of 2020 once again highlights the current amount of spending power, which we believe is mostly being held in reserve until lockdown restrictions lift even further and people can return to a more “normal” summer.

One concern regarding the expected surge in consumer spending in the coming months is a quick resurgence in inflation given the large size of the recently passed stimulus, along with the spending capacity held by a large portion of consumers even without that stimulus. However, currently core inflation remains muted, which we believe will likely allow the Federal Reserve to wait and observe the pace of recovery before having to consider the possibility of raising rates or reducing the pace of balance sheet expansion. Even if inflation does rise quickly, the Fed has made it clear that it would be willing to allow inflation to “run hot” over a time period above its usual two-percent target to make up for periods where it ran below the target, though both the length of that time period, as well as the extent that the Fed would actually let inflation “run hot,” are unclear.

In housing, the decline in refinances outweighed a gain in purchase applications, likely due to the recent rise in mortgage rates. However, we believe the jump in purchase applications, if sustained, is a positive sign for sales in the coming months.

Ricky Goyette
Economic and Strategic Research Group
March 12, 2021

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 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.