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Are Consumers Signaling a Slowdown Ahead?

The Conference Board’s Consumer Confidence Index for May remained essentially unchanged from April, but a deep dive into the two components suggests there may some early indications for concern down the road.

The overall index stands at 117.2, dipping slightly from 117.5 in April, the Conference Board said on Tuesday.

However, a read on the two components might be reflecting an early divergence in the present outlook versus what could be six months out.

Currently, the Present Situation Index remains fairly upbeat, increasing to 144.3 from 131.9 in April. The Present Situation component measures consumers’ assessment of current business and labor market conditions. While consumers’ assessment of current business conditions as “good” slipped to 18.7 percent from 19.4 percent, the proportion of those who  said business conditions are “bad” also fell to 21.8 percent from 24.5 percent. And, more importantly, percentage of respondents who said jobs are “plentiful” jumped to 46.8 percent from 36.3 percent. Overall, consumers’ appraisal of current conditions improved in May.

Their outlook on the short term wasn’t so optimistic, and could give cause for concern over the next six months. The Expectations Index is the component that measures consumers’ outlook for income, business and labor market conditions over the near term—and it fell to 99.1 in May from 107.9 in April.

The Conference Board’s May reading is based on an online sample of over 36 million consumers, with May 19 the cutoff for preliminary results. Of the respondents surveyed, those who expect business conditions to improve over the next six months fell to 30.3 percent from 33.1 percent, while those tho expect business conditions to worsen rose to 14.8 percent from 12.1 percent. More importantly, the proportion expecting more jobs in the months ahead fell to 27.2 percent from 31.7 percent.

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Consumer spending accounts for 70 percent of the nation’s economic activity, and retail is a critical component of that. How confident consumers feel when it comes to opening their purse strings is largely dependent on the jobs front, particularly for discretionary spending, such as on apparel.

Lynn Franco, senior director of economic indicators at The Conference Board, said short-term optimism retreated over expectations of decelerating growth and softening labor market conditions. “Consumers were also less upbeat this month about their income prospects—a reflection, perhaps, of both rising inflation expectations and a waning of further government support until expanded Child Tax Credit payments begin reaching parents in July,” she said. Franco noted that consumer confidence should remain resilient as vaccination rates climb, Covid-19 cases decline further and the U.S. economy fully opens.

“You could get away with saying that confidence was ‘little changed’ going to 117.2 in May from 117.5 the month before, but to be precisely right, we must call it what it is: a modest decline. To be sure, there is still a trend improvement from the 87.1 reading back in January, but by any reckoning the rebound has lost momentum,” Wells Fargo economist Tim Quinlan said on Tuesday.

The economist also said that consumers might need some time to shake off what he labels the “pandemic mindset.” With the temporary shutdown of the Colonial Pipeline this month, and the recent memory of empty shelves at the grocery store, it might not be so easy to shift gears despite vaccination efforts and newly restored freedoms.

Quinn does believe that there will be robust consumer spending in the coming months, especially in leisure categories, which he says have the “most room for growth.”

So while restaurants, bars and other similar businesses could be the beneficiaries of increased consumer spending, that could suggest less money earmarked for apparel purchases. Anxiety over inflation could crimp spending on clothing and shoes as well.

“Consumers are also gradually waking up to the reality that manufacturers have been grappling with for the better part of the past year: the supply chain constraints amid strong demand are stoking inflation expectations,” Quinn said, noting that consumers rarely consider inflation until they experience it. “With people only beginning to get out and experience the services side of the economy, we suspect sticker shock will be a common reaction.”

Quinn noted that a strong demand environment means that manufacturers and service providers have pricing power. That in turn could mean that as households continue to experience inflation, the “hand wringing over where prices are headed could get worse,”he said.

In February, the National Retail Federation forecasted annual retail sales growth this year between 6.5 and 8.2 percent, with spending picking up in the second and third quarters.