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Economic Watch: Consumer Sentiment Hits 6-Month Low, Housing Starts Fall

January 19, 2018

By Evan Lockridge

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Consumers are feeling less upbeat, due to uncertainty about economic conditions following the tax overhaul recently signed into law, according to a new report. Meanwhile the level of new home construction last year was the best in a decade despite a December decline.

The University of Michigan’s Survey of Consumers reported its Index of Consumer Sentiment showed a small preliminary decline this month from last, down 1.6% to a reading of 94.4. The drop from the same time a year earlier was larger, 4.2%.

This is a six-month low and comes after the gauge in October 2017 hit its highest level since 2004. It’s also in contrast to a consensus forecast from analysts who expected it to move higher in January.

There were also declines in consumers’ evaluation of current economic conditions. Their expectations were slightly better than December but down from January 2016.

The survey recorded persistent strength in personal finances and buying plans. Favorable levels of buying conditions for household durables have receded to preholiday levels in early January, largely due to less attractive pricing, according to Surveys of Consumers Chief Economist Richard Curtin.

“Tax reform was spontaneously mentioned by 34% of all respondents, 70% of those who mentioned tax reform thought the impact would be positive, and 18% said it would be negative," he said. “The disconnect between the future outlook assessment and the largely positive view of the tax reform is due to uncertainties about the delayed impact of the tax reforms on the consumers. Some of the uncertainty is related to how much a cut or an increase people, especially high-income households who live in high-tax states, face.”

He noted while near- and long-term gasoline price expectations inched upward in early January, they remained significantly below their peak. Also, while long-term inflation expectations remained at their 2017 average level and short-term inflation expectations inched upward, consumers continued to remain very optimistic about the low national unemployment rate.

2017 Housing Starts Best In 10 Years

This followed a report from the day before showing new home construction fell 8.2% in December from an upwardly revised November reading, according to the Commerce Department, the biggest drop since November 2016.

The December numbers showed a return to trend after an especially strong November report, but overall 2017 saw significant gains in housing production. Starts rose 2.4% last year to 1.20 million units, the highest level since 2007. It was pushed higher by an 8.5% jump in the single-family sector, which makes up a majority of the market, while multifamily starts dropped 9.8%.

Single-family starts in December fell 11.8% to a seasonally adjusted annual rate of 836,000 units. However, the three-month moving average for single-family production reached a post-recession high. Meanwhile, multifamily starts ticked up 1.4% to 356,000 units.

“A return to normal levels of housing production this month is expected after a very strong fall season,” said National Association of Home Builders Chief Economist Robert Dietz. “We saw a surge of housing activity in the South after hurricane-related delays, and now that region is returning to its positive growth trend.”

NAHB is forecasting continued growth in housing production this year, led by ongoing single-family gains. Total housing starts are expected to grow 2.7% to 1.25 million units. Single-family production is forecast increase 5% to 893,000 units, while the multifamily sector is expected to edge 1.6% lower this year to 354,000.

Wells Fargo Securities said December’s pullback in housing starts appears to be nothing more than “typical winter volatility.”

“Residential construction tends to pull back as winter approaches, so anything outside the norm tends to have a disproportionate impact on the reported figures,” said Mark Vitner, senior economist at Wells Fargo Securities.

He said strength in permits relative to starts suggests homebuilding will ramp up once the weather warms up.

“Starts rose at a 29.7% pace in the fourth quarter, while permits surged at a 25.5% pace,” Vitner said. “We look for single-family starts to rise 11.2% in 2018 and look for multifamily starts to rise 1.4%. The late-year surge in multifamily permits suggests we may see more strength than that. Apartment construction may catch a second wind in 2018, after slipping this past year. Interest in condominium development also seems to be perking up.”

Despite the lower December numbers for new home starts, home builders are optimistic about the prospects for 2018, with a survey from a couple of days earlier that showed builder confidence in the market for newly built single-family homes remained high.

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