The fall in the Conference Board consumer confidence index to an 18-month low of 120.2 in January, from 126.6, appears to have been driven by a combination of the government shutdown and the earlier volatility in financial markets. With the shutdown now over and equity prices recovering, there is a good chance that confidence will rebound in February.
The decline was driven exclusively by a deterioration in the expectations index, which dropped to 87.3 from 97.9, with the present situation component little changed. The press release confirmed that the Federal government shutdown, which was still underway during the survey period, and the earlier weakness in equity markets were the main factors weighing on sentiment. With the shutdown now resolved, however, we don’t expect it to have any lasting impact on the economy. Furthermore, the S&P 500 has rebounded by more than 10% from its late-December lows. With labour market conditions still very strong, we wouldn’t be surprise to see confidence pick up again over the next couple of months. The net share of respondents saying that jobs are plentiful, rather than hard to get, remained close to an 18-year high in January. On past form, that is consistent with the unemployment rate falling even lower over the coming months.
Confidence hasn’t been a great guide to spending in recent years so, even if the decline in January is sustained, that wouldn’t in itself mean that consumption growth will soon slow. But with the boost from last year’s tax cuts now fading and the lagged impact of the Fed’s monetary tightening still feeding through, the rapid pace of spending growth seen over the second half of 2018 is unlikely to be sustained.