Consumer Confidence Slips amid COVID and Inflationary Concerns, Though Manufacturing Industry Continues to Rebound

Key Takeaways:

Due to the holiday weekend, nonfarm payroll employment will be included in our weekly update next week.

• The Conference Board Consumer Confidence Index declined sharply in August, decreasing 11.3 points to 113.8, the lowest level since February 2021 and the largest monthly decline since April 2020. Both the present situation and future expectations components declined, falling by 9.9 and 12.4 points, respectively. According to the press release, concerns regarding both the Delta variant and increased gas/food prices contributed to an overall decrease in consumer confidence.
• Light vehicle sales dropped 11.1 percent in August to a seasonally adjusted annualized rate (SAAR) of 13.1 million units, the steepest decline since April 2020 and the lowest level since May 2020, according to Autodata. The fall in sales marks the fourth straight monthly decline.
• The ISM Manufacturing Index rose 0.4 points to 59.9 in August, the 15th month in a row above the expansionary threshold of 50. The new orders and the production indices increased 1.8 points to 66.7 and 1.6 points to 60.0, respectively. The prices paid index fell by 6.3 points to 79.4, the lowest level since December 2020. The employment index contracted 3.9 points to 49, the lowest since November 2020. The inventories index increased 5.3 points to 54.2, the largest monthly increase since February 2014 and the highest level since November 2018.
• Factory orders grew 0.4 percent in July, the 14th monthly increase in the past 15 months, according to the Census Bureau. Excluding transportation, factory orders were up 0.8 percent, while core capital goods orders ticked up 0.1 percent along with an upward revision to June. Factory shipments rose 1.6 percent, the fifth straight monthly increase. Nondurable goods orders increased 0.9 percent.
• 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, fell 1.8 percent to 110.7 in July.
• Private residential construction spending rose 0.5 percent in July, according to the Census Bureau. The increase was driven mostly by new single-family housing construction, which increased 0.9 percent, while multifamily construction remained essentially flat. Spending on improvements ticked up 0.2 percent.
• The FHFA Purchase-Only House Price Index increased 18.8 percent from a year ago in June, setting a new annual growth record for the eighth straight month. For Q2 2021, the index was up 17.4 percent from a year prior, the fastest annual growth pace for the quarterly index on record.
• The real goods U.S. trade deficit narrowed by $4.8 billion to $100.1 billion, according to the Census Bureau. Exports increased 1.0 percent and imports fell 1.4 percent.

Forecast Impact:

The ISM Manufacturing Index remained solidly in expansionary territory as new orders continued to flow in, consistent with our expectation that businesses rebuilding depleted inventories will help drive economic growth in Q3 and Q4. Though inflation remains a concern as the prices index is still elevated, the 6.3-point decline suggests that many of the more transitory inflationary pressures may be beginning to ease. Further, the increase in factory shipments suggests that some supply chain bottlenecks may also be easing. However, the dramatic fall in light vehicle sales, which is due primarily to the semiconductor shortage leading to limited available inventories as well as strong price growth, reflects that some supply chain issues persist, which we expect will likely constrain future growth.

We expect consumption to moderate significantly in Q3 as pent-up summer demand wanes, along with the lack of a stimulus-related boost in spending. Our current outlook for growth depends on a shift in consumer spending from goods to services, which would help allow firms to rebuild their inventories. The sharp decline in consumer confidence, driven by Delta variant and inflationary concerns, has the potential to dampen the pace of recovery in spending on services. Further, employment in the leisure and hospitality industry remains well below pre-pandemic levels, so future payroll gains are dependent in part on consumers’ willingness to spend in this sector. If other indicators suggest that Delta variant concerns are negatively impacting spending on services, we will likely downgrade our near-term expectations of consumer spending and growth overall.

In housing, while demand is softening somewhat, the decrease in the pending home sales index likely primarily reflects the lack of homes available for sale. We continue to expect a modest increase in existing home sales through the end of 2021 as more homes come on the market. While house price growth continues to set new records, we continue to believe home price growth will moderate in 2022.

Nathaniel Drake and Rebekah Gutierrez
Economic and Strategic Research Group
September 2, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.