Weaker consumer sentiment and dwindling new-home sales pointed Tuesday to a sputtering economy, setting up a key announcement by the Federal Reserve to raise interest rates again as the central bank tries to cool historic inflation without causing or deepening a recession.
The monthly consumer survey by the Conference Board, a business research group, showed consumer confidence fell in July for the third straight month to its lowest level since February 2021, one month into President Biden’s term.
By a 2-1 margin, consumers expect business conditions to get worse. Consumer spending accounts for more than two-thirds of total economic activity.
New-home sales fell by 8.1% in June, the Commerce Department reported, the biggest drop in more than two years as mortgage rates climbed to about 5.5%. Last year, a 30-year fixed mortgage rate averaged 3% — costing nearly $500 less per month on a $300,000 home loan.
The indicators were released a day before the Fed’s expected announcement that it will raise its benchmark borrowing rate again by three-quarters of a percentage point to combat chronically high inflation. It will be the central bank’s fourth rate hike since March.
Inflation hit a 41-year high of 9.1% in June as consumers paid more for gasoline, food, rent and other items. Chicken costs 19% more than a year ago, butter is up 26% and gasoline is 37% higher.
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“Concerns about inflation — rising gas and food prices, in particular — continued to weigh on consumers,” said Lynn Franco, senior director of economic indicators at the Conference Board. “As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes and major appliances all pulled back further in July. Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months.
“Recession risk persists,” she said.
Some economists say the U.S. is already in a recession after the economic contraction in the first quarter. Second-quarter gross domestic product data will be released on Thursday, and Clinton and Obama administration economic adviser Larry Summers said there is “a very high likelihood of recession.” Two quarters of negative growth is informally considered a recession.
Mr. Summers and Republicans say the Biden administration and congressional Democrats have contributed to high inflation by pumping nearly $2 trillion in COVID-19 relief into the economy last year. Senate Minority Leader Mitch McConnell, Kentucky Republican, on Tuesday cited Mr. Summers’ forecast of a downturn.
“This is a top Democrat talking,” Mr. McConnell said on the Senate floor. “But he is intellectually honest. He tried to advise Washington Democrats not to dump nearly $2 trillion onto the economy, but they didn’t listen. And now working families are stuck with skyrocketing costs and bills as a consequence.”
To push back on news of a possible recession in a midterm election year, the administration scheduled a press conference Thursday for Treasury Secretary Janet Yellen. The president has been in quarantine this week while recovering from COVID-19.
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Ms. Yellen will again lay the blame for inflation partly on “Russia’s illegal and unprovoked war in Ukraine, as well as the ongoing effects of pandemic-related disruptions,” Treasury said. She will discuss “the resilience of America’s workers, businesses, and economy in the face of these international headwinds.”
Treasury said in an analysis Tuesday that Mr. Biden’s release of oil from the nation’s Strategic Petroleum Reserve, combined with similar releases from allies, has lowered gas prices by 17 cents to 42 cents per gallon.
As the Fed prepares to raise interest rates, it’s weighing crosscurrents in the economy. Because of high inflation, real wages are down. Still, the jobs market is strong with an unemployment rate near a historic low of 3.6%.
Corporate earnings have been generally healthy, but warning signs are emerging across U.S. industries.
Walmart issued a rare midquarter warning Monday that it is cutting its profit outlook for the second quarter and for the year. The retail giant said soaring prices for food and gas are forcing shoppers to curb spending on clothing and other items, leading it to slash prices.
The company’s stock declined more than 7% on Tuesday. All three major stock indexes were down for the day.
General Motors said it missed earnings projections in the second quarter after failing to deliver about 95,000 vehicles because of a shortage of computer chips. The automaker’s stock price fell more than 3%.
The Senate on Tuesday advanced a $52 billion measure to encourage domestic semiconductor manufacturing, which is critical for items such as smartphones, automobiles and the Pentagon’s advanced weapons systems. The action sets up a legislative win for Mr. Biden before Congress leaves town for its August recess, although analysts say the legislation likely won’t make an economic impact for years.
Mr. Biden met virtually with the head of South Korea’s SK Group to announce that the conglomerate will spend $22 billion to expand its business interests in the U.S. The projects include an electric vehicle venture with Ford Motor Co. in Texas and semiconductor manufacturing.
For weeks, White House advisers have been trying to steer news coverage about the economy away from declaring a recession. National Economic Council Director Brian Deese said Tuesday that hiring in the U.S. and demand by consumers and businesses have remained strong this year.
“That’s in contrast with what we typically see in recessions,” Mr. Deese told reporters. “Two negative quarters of GDP growth is not the technical definition of a recession.”
Although some economists consider two straight quarters of negative GDP growth as an informal recession, the National Bureau of Economic Research declares official economic downturns. The nonprofit group of economists looks at indicators beyond GDP growth or decline.
Mr. Deese said Mr. Biden is focused not on economic definitions but on whether middle-class families “have more breathing room.”
By raising borrowing rates, the Fed makes it costlier to take out a home, auto or business loan. In turn, consumers and businesses likely will borrow and spend less, cooling the economy and slowing price increases.
The central bank is betting it can slow growth just enough to tame inflation yet not so much as to trigger a recession. Many analysts fear the risk may end badly.
The Fed’s rate hikes aren’t suited to address all the causes of high inflation. Higher borrowing rates can reduce spending, but they cannot reverse other factors — notably the global shortages of food, energy, factory parts and other items that have been worsened by Russia’s war against Ukraine and COVID-19-related shutdowns in China.
It likely will take months for the Fed’s higher rates to reduce spending on airline flights, restaurant meals and other services. Many economists worry that means the Fed will have to clamp down even harder on consumer and business demand to bring it into balance with the economy’s restricted supply of goods and labor.
• This article is based in part on wire service reports.
• Dave Boyer can be reached at dboyer@washingtontimes.com.
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