Consumer confidence finally reversed course in May, unwinding a three-month spiral with a surprise uptick. The Conference Board’s Consumer Confidence Index is a leading indicator that measures optimism. May’s reading far exceeded economists’ expectations of 96 and April’s 97.5 print with an extremely optimistic 102. This growth in confidence indicates a much more optimistic outlook for American consumers.
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On the surface, that’s great news, but caution has tempered any market enthusiasm because of lingering concerns about inflation and the potential interest rate hikes it leads to.
Strong Job Market Bolsters Confidence
The strong job market continues to be a major bright spot for consumers. The unemployment rate remains incredibly low, hovering below 4% for a record-breaking 27 months.
The Conference Board’s report highlights this improvement in views on current labor market conditions. The consumer survey from which the report was created showed fewer Americans describing jobs as “hard to get.” This stability in the job market creates a solid foundation for a more confident consumer who is more comfortable spending money.
Inflation Anxiety Lingers Despite Uptick
While confidence is rising, concerns about inflation haven’t disappeared. Consumers continue to cite rising prices, particularly for food and groceries, as a major concern impacting their economic outlook. The Conference Board’s reading on 12-month inflation expectations even ticked up slightly to 5.4%.
This highlights the ongoing struggle many Americans face with rising costs, preventing a full rebound in confidence.
Interest Rate Hikes on the Horizon?
The Federal Reserve has signaled its intention to combat inflation and hasn’t ruled out potential interest rate hikes. This new uptick in consumer confidence, coupled with a still-strong job market, could eliminate any hope of rate cuts and instead increase chatter about whether rates are high enough at current levels.
The next look at inflation will come on Friday of this week, as investors are awaiting the release of the Personal Consumption Expenditures Index (PCE), the Fed’s preferred inflation gauge. This should provide further clues on the central bank’s monetary policy decisions.
Who’s Feeling Most Optimistic?
The Conference Board’s report also provides insight into which demographics are most confident about the economy. Unsurprisingly, with the stock market reaching record highs, wealthier Americans are leading the charge.
Consumers earning over $100,000 annually reported the largest increase in confidence. Notably, young, affluent consumers under 35 have shown the highest confidence on a rolling six-month basis. This likely reflects both a generational difference in risk tolerance and the positive effects of a strong stock market on their investment portfolios.
If this trend continues, the industries likely to benefit are travel, leisure, and large durable goods purchases.
Key Takeaway
The uptick in consumer confidence is a welcome sign, but it’s important to recognize the nuanced picture. While a resilient job market is helping consumers gain confidence and giving them comfort enough to splurge, inflationary pressures remain a concern.
This could potentially push the Fed to hike interest rates. The coming months will be crucial in determining whether this uptick is a temporary blip or the start of a sustained rise in consumer confidence.
