Consumer Confidence Rising as Inflation Pressures Ease
As I have written widely during the past few weeks, there is a series of metrics and indicators that point to continuing strength in the economy, with arrows from every imaginable direction pointing upward.
Of course, leading off all the good news was the first interest rate cut by the Fed in four years. In September, the all-but-assured rate cut of 25 basis points was supplanted by a far more aggressive 50 basis points, with more to come. The Fed turned its attention from their inflation target of 2% and studied a softening labor market instead, hence the larger-than-expected cut. And the week before the rate cut, a survey of mortgage applications climbed 14.2% on a seasonally adjusted basis in anticipation of the rate cut, and there are expectations of further cuts this fall.
On the inflation front, consumer prices rose 2.2% year-over-year in August as measured by Personal Consumption Expenditures, the lowest annual inflation rate since February 2021. Overall inflation is nearly back to the Fed’s goal of a 2% annual rate, though rent inflation has stayed stubbornly high and is the single biggest component of the upward pressure on inflation.
Then there is the stock market, busting through previous records to mark all-time highs during the past couple of months. Of course, the biggest indicator is the overall economy, which grew at a 3% annualized pace in the second quarter, a much faster rate than Wall Street had expected. The Bureau of Economic Analysis’ estimate of second quarter U.S. Gross Domestic Product (GDP) showed a 3% annualized growth, higher than the 1.4% annualized growth seen in the first quarter.
All this converges to calm the consumer and bolsters their view of the current state of affairs. Consumer sentiment continued to rise in late September, reaching a five-month high on more optimism about the economy in the wake of the Federal Reserve’s interest-rate cut. Further reductions in borrowing costs are helping to underpin consumers’ outlook on the economy and their personal finances.
What does all this mean? A strong GDP, falling interest rates, a strong stock market and bolstered consumer confidence all point to prosperity for the foreseeable future. And lower rates will drive increases in housing development, addressing the tremendous pent-up demand that exists for new homes, as well as commercial construction across all categories. We can expect strength in construction spending and private and public development for months, if not years, ahead.