Consumer confidence in April fell well short of expectations, dropping to its lowest level in nearly two years as people expressed some growing pessimism about the economy.
The Conference Board’s consumer confidence index fell to 97 in April, down from a revised 103.1 the month before, the group announced on Tuesday. That is the lowest consumer confidence reading in 22 months.
Tuesday’s report marks the third month of declining consumer confidence. Economists had expected consumer confidence to rise to 104, so the latest reading is a big miss and bad news for President Joe Biden and Democrats, who are working to shore up perceptions of their economic stewardship in a critical election year.
The expectations index, which tracks the short-term outlook of consumers for business, income, and labor market conditions, fell to 66.4 this month from 74 in March. An expectations index reading below 80 often signals a forthcoming recession, according to the Conference Board.
“Confidence retreated further in April, reaching its lowest level since July 2022 as consumers became less positive about the current labor market situation and more concerned about future business conditions, job availability, and income,” said Dana Peterson, chief economist at the Conference Board.
The drop in consumer confidence was observed across all age groups in the survey and almost all income groups. Younger consumers, those under 35, expressed greater confidence than those over 35. Those with incomes below $25,000 annually and above $75,000 reported the biggest declines in confidence.
Inflation played a big role in the deterioration of consumer confidence, according to the survey. Recent readings have shown that inflation is moving in the wrong direction despite the Federal Reserve holding interest rates at their highest level in years.
“According to April’s write-in responses, elevated price levels, especially for food and gas, dominated consumers’ concerns, with politics and global conflicts as distant runners-up,” Peterson said. “Average 12-month inflation expectations remained stable at 5.3% despite concerns about food and energy prices.”
Inflation, as tracked by the closely watched consumer price index, rose to 3.5% in March, more than expected, and the producer price index rose 0.6 percentage points to 2.1%. In the Fed’s preferred gauge, the personal consumption expenditures index, inflation rose to 2.7%, also more than expected.
The Fed has kept interest rates at 5.25% to 5.50% since July as it assesses the rate hikes’ effects not only on inflation but the labor market. Fed officials had indicated they would begin cutting rates this year, but now, with the hotter inflation reports, the first cut is likely months away, and there are growing odds of no interest rate cuts in 2024.
Investors are now betting there won’t be an interest rate cut until after the November election, something that could harm Biden politically and will undoubtedly be used by former President Donald Trump and Republicans as a line of attack as the election heats up.
Higher interest rates can filter through to consumer and business borrowing and slow commerce. If the unemployment rate starts to rise, it would also be harmful to Biden. But thus far, the labor market has remained resilient, and jobs data keep showing underlying strength, giving the Fed some ammunition to keep rates higher for longer.
The jobs report for March, for instance, showed the labor market is still expanding rapidly and that unemployment is very low by historical standards, at 3.8%. There has also been positive GDP growth for months now, an indication of broader economic output.
Despite the declines in consumer confidence, spending has still remained robust, somewhat contradictory signals that the Fed will have to digest.
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“An aspect of this that is tricky to rationalize is how consumer spending can remain so strong even as morale can be so low,” Wells Fargo economists said in a Tuesday report. “It may be that in order to sustain the breakneck pace of spending, consumers are spreading themselves thin.”
The Fed’s monetary policy committee meets this week in Washington, D.C., where it will discuss the inflation situation. It is expected once again to hold interest rates steady.