Real Consumption Declines as Consumer Confidence in the Future Continues to Erode

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, decreased at a 1.6 percent seasonally adjusted annualized rate in Q1 2022, a revision of one-tenth lower compared to the second estimate from the Bureau of Economic Analysis (BEA). The downward revision was primarily caused by lower personal consumption expenditures. This was partially offset by an upgrade to private inventory investment.
• Personal income, adjusted for inflation, declined 0.1 percent in May, according to the BEA. Real disposable income was also down 0.1 percent, marking its eighth monthly decline in the past 12 months. Real personal consumption expenditures fell 0.4 percent, its worst month since December 2021, and the past three months’ consumption gains were all revised lower. The saving rate increased two-tenths to 5.4 percent, and April’s figure was revised upward six-tenths to 5.2 percent. The PCE price index increased 0.6 percent over the month (up 6.3 percent on an annual basis), while core PCE increased at a slower 0.3 percent in May and 4.7 percent over the year.
• Durable goods orders increased 0.7 percent in May, according to the Census Bureau. Orders for motor vehicles and parts increased 0.5 percent and were upwardly revised from a decline of 0.2 percent to a 0.1 percent increase in April. Core capital goods orders (nondefense excluding aircraft) rose 0.5 percent and shipments of core capital goods, a good proxy for business fixed investment, rose 0.8 percent for the second consecutive month and fifteenth consecutive month of increase. Unfilled orders of durable goods were up 0.3 percent, the smallest gain since January 2021, while inventories increased 0.6 percent.
• The Conference Board Consumer Confidence Index declined 4.5 points to 98.7 in June, its lowest level since February 2021. Consumer expectations plummeted 7.3 points to 66.4, the lowest level since January 2013, while confidence in the present situation was more stable, declining only 0.3 points to 147.1.
• The National Association of REALTORS® Pending Home Sales Index which records contract signings of existing homes and typically leads closings by one to two months, increased 0.7 percent in May, ending a six-month streak of declines. Still, the index is down 13.6 percent on an annual basis.
• The FHFA Purchase-Only House Price Index increased 18.8 percent from a year ago in April, a deceleration of three-tenths from March.

Forecast Impact:

Price increases again outpaced wage gains in May, but we expect the largest impact to our forecast will be the downward revisions to real consumption over the past three months and the outright decline in May. After months of extremely negative consumer surveys failing to align with actual consumer behavior, it appears now that waning consumer confidence is finally impacting consumption. We now expect Q2 consumption expenditures will be significantly lower than our June forecast of a 4.2 percent annualized rate. We do not think it’s likely the economy is currently in a recession, due in part to a robust labor market and strong industrial production numbers.

Capital goods orders and shipments surprised to the upside, especially given recent survey and manufacturing data pointing to a relatively sharp slowdown. At first look, the data appear to be consistent with higher Q2 business fixed investment than our current forecast, but we are unlikely to revise our forecast based on this report due to some important caveats. First, producer prices continued to rise in recent months, so real orders grew at a slower rate. Second, recent export data has shown strength in capital goods equipment, suggesting a portion of these orders will not be counted toward equipment investment (though they will support net exports), and finally, other indicators for business investment have weakened recently.

In housing, May pending home sales were above our expectations and are consistent with a modestly higher June existing sales number than our Q2 forecast currently implies. However, this figure is somewhat at odds with other near-term indicators showing lower buyer demand and increasing inventories of homes for sale. On balance, we may modestly upgrade our near-term existing home sales forecast based on this data, but we still believe existing sales will continue to decline through the rest of the year as higher mortgage rates continue to weigh on affordability.

Nathaniel Drake
Economic and Strategic Research Group
June 30, 2022

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