US Consumer Confidence Dips in February Amid Inflation Worries and Future Uncertainty

The latest report from The Conference Board has shown that US consumer confidence declined in February, with the decrease entirely driven by expectations. The index fell to 102.9 in February from 106 in January and 109 in December. However, it should be noted that December's reading was the highest since September 2021.

While the data shows a decline in consumer confidence, there is still an optimistic view of the current state of the US economy. The present situation index rose for a third straight month, underpinned by upbeat views on employment and business conditions. This index rose 1.7 points to 152.8, with the differential between jobs 'plentiful' and jobs 'hard to get' rising to 41.5 points, the highest since April 2022. This indicates that current labor market conditions are still quite tight.

The strong labor market lifted consumers' current expectations while fears about the future loomed. Consumers remain pleasantly surprised that the soft labor market they'd braced for hasn't materialized just as executives fretting over recession remain similarly relieved.

In January, the US economy added a surprising 517,000 jobs, while the unemployment rate stood at 3.4%. However, executives talking to Goldman Sachs CEO David Solomon remain uncertain about the course of inflation as they move through 2023 and 2024. They believe that inflation will be stickier and harder to moderate than markets now predict. Solomon has said that the executives he spends his days speaking with are feeling better about a "soft landing" for the economy, but that inflation worries are "hampering confidence."

The Conference Board's data shows that consumers and executives share a similar view: they feel good about today and worse about tomorrow. It's been a challenging year for everyone, with the S&P 500 falling 19%, the price of gas in the US hitting $5 a gallon, and the inflation rate reaching 9.1%. In less than a year, the Fed has raised interest rates 4.5%, while the housing market got crushed. The most popular investing strategy for those saving for retirement endured its worst year on record. All of these issues have improved in 2023, but there is still a sense from investors and consumers that the worst is yet to come.

Economists at Wells Fargo said in a note that the consumer confidence data "pours some cold water on the streak of strong economic data received to start the year." Chris Rupkey, chief economist at FWDBONDS, said that "if consumers drive the economy, the outlook for 2023 is bleak as the consumers expect that the worst is yet to come."

On Tuesday, The Conference Board's Expectations Index stood at 69.7, notable as any reading below 80 is typically consistent with a recession, according to the report. This index, however, has been below 80 for 11 of the last 12 months. Solomon has said there is typically a "4 to 6 quarter lag before people reset their expectations."

While there are some positive signs for the US economy, consumers and executives remain concerned about the future. Both groups are braced for some version of economic impact, and it's just not clear if it has already happened. The question is in which direction do consumers and businesses need to reset expectations against those held today. And, once they do, will it already be too late?