It looks like we need to go back to worrying about the U.S. economy, at least for the near future. Bloomberg reports that the Thomson Reuters/University of Michigan consumer sentiment index indicated that consumer confidence declined in July—from June’s 84.1 to 83.9. This goes against anticipations that it would have actually risen slightly.
It’s uncertain what exactly caused this setback, but we can make some reasonable guesses. Mortgage rates, home prices, and gas prices have all risen quickly in the recent past, and those likely impacted confidence.
From Bloomberg:
“It’s a slip in confidence from recent highs rather than the start of a new downward,” said Gennadiy Goldberg, a strategist at TD Securities Inc. in New York. “As we get later in the year and the economy improves, consumers will start to see better numbers and they’ll notice that.”
Mortgage rates recently hit their highest peak in two years, with the average for 30-year fixed-price mortgages going to 4.51 percent. For the record, last November it was at a record low of 3.51 percent. As for gas prices, average cost for a gallon of regular gas was $3.55 last Thursday, which is another increase from $3.47 the week prior.
However, unemployment figures have been improving, which has had a markedly positive effect on consumer spending. The latest data from the Labor Department indicated that June added 195,000 workers—that’s the second such month in a row. And hourly earnings in the year leading to June rose significantly since July of 2011.
In further indicators that suggest a general recovery, retail sales were up 0.6 percent in May, while cars and light trucks were selling at an annualized rate of 15.89 in June, which is the highest since November 2007.
Nonetheless, concerns over these rising rates combined with declining stock prices to hurt early July’s consumer sentiment. A lot of it also has to do with the U.S. Federal Reserve’s declared intention to wind down its asset-buying stimulus program some time in the near future. That led to major sell-offs in June (and an accompanying rise in mortgage rates).
The Fed then moved to reassure markets by asserting it is nowhere close to an end to the program just yet, which helped a recovery of sorts. Meanwhile, Reuters reports that U.S. producer prices rose unexpectedly in June—about 0.8 percent—which could mean that the downward inflation trend might be nearing an end. Such a rise implies that demand is high enough that prices have room to move higher, which would be a good thing.
This could have a domino effect, though. Encouraging data would mean the U.S. Federal Reserve is likely to feel justified in its recent claims about tapering off the stimulus, which could lead to an early end to the stimulus program. Latest inflation measures pegged it at a 1.3 percent gain in consumer prices through the year ending May, which is still well below the Fed’s target of 2 percent.
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General Trends Remain Complex
What’s interesting about this recent trend is that lower-income households continue to express good confidence, and the decline in confidence is seen chiefly among those making in excess of $75,000 per year.
It’s likely that these latter are worrying about further hikes in interest rates. While the Thomson Reuters/University of Michigan index went to 83.9, the gauge for current economic conditions was up to 99.7 from 93.8. That’s the highest since July 2007. However, the measure for expectations was down from 77.8 to 73.8, reports the Chicago Tribune.
The expectations for one-year inflation rose to 3.3 percent—indicating that consumers are in fact concerned over the rising rates and their possible slowing-down effect on general economic growth and employment numbers. However, the five-to-ten-year inflation expectation remained more or less steady at 2.9 percent.
To complicate all of this, the spike in rates could actually benefit the housing market, which is undergoing its own recovery. That’s because with rates appearing to be poised for a significant rise, higher-income households are now more likely to splurge on major housing expenses in anticipation of rates rising in the future.
Altogether, the situation is complex with numerous factors playing against each other. While it’s hard to make any sure bets, it’s worth looking at platinum and palladium as safer investments. Both are heavily used in the automobiles sector (which has a great outlook), and both face serious supply problems with labor disputes in South Africa remaining unresolved.
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