Americans’ confidence in the economy slipped in May, a month after U.S. home resales unexpectedly rose for the third straight month.
The Conference Board’s index of consumer confidence fell in May to 101.2 from a revised 104.8 in April. That’s still above the index’ average of 99.2 for all of 1995.
Home resales, meanwhile, increased 0.5 percent last month to an annual rate of 4.22 million, the highest level since December 1993, according to the National Association of Realtors. The figures represent actual closings. Analysts had expected a 2.6 percent decline for the month.
The statistics suggest the Federal Reserve will refrain from increasing interest rates in July or August because economic growth is so subdued, said Richard Yamarone, an economist at Market Data Corp. of Rye Brook, New York. Last week, Fed officials took no immediate action at their most recent meeting on monetary policy.
In this month’s consumer confidence report, respondents were more upbeat about present economic conditions than about future growth and job creation. While the index of present conditions inched up to 118.3 from 118.2, the index gauging consumers’ expectations for the next six months dipped to 89.7 from 95.9.
The Conference Board also found that fewer respondents expect their incomes to rise over the next six months. The indices measuring consumers’ plans to buy a major appliance or a home over the next six months fell, though more respondents said they planned to buy cars.
“People really are stretching to maintain their standards of living,” said Alan Segars, managing director at Furman Selz Capital Management in New York, which holds about $1.5 billion in bonds. Higher consumer debt levels, in turn, could erode confidence in the economy in months to come, he said.
Since previously owned homes make up about 85 percent of all U.S. single-family home sales, the report from the realty group is a key gauge of the health of the housing industry.
“There are some signs higher rates are having effects on home sales,” said Carl Palash, chief economist at MCM MoneyWatch in New York. Palash pointed to the mixed regional results as evidence.
The Northeast was the only region to register an increase in home resales. Sales there rose 10 percent to an annual rate of 660,000 during April.
In the West, sales were unchanged at an annual rate of 970,000. Sales fell 1.3 percent in the South to a rate of 1.540 million, and in the Midwest sales dropped 2.8 percent to a 1.050 million rate.
In April, the average rate on a 30-year fixed loan rose to 7.93 percent from 7.62 percent in March. That put the average monthly payment on a $100,000 loan at $728.89 last month, up from $707.45 during March.
Rates continued to move higher in the weeks since, although last week’s average rate on a 30-year mortgage declined to 8.01 percent from 8.08 percent a week earlier, according to the Federal Home Loan Mortgage Corp.
Earlier this month, the Mortgage Bankers Association of America predicted that 30-year mortgage rates will average 7.98 percent for all of this year.
Still, housing is likely to “hold its own” in the months ahead, said William Sullivan, an economist at Dean Witter Reynolds in New York. “Prospective buyers have tremendous options. They don’t have to go to a 30-year fixed mortgage. They can get an adjustable rate mortgage.”
Additionally, a runup in stock and mutual fund prices “has created a substantial amount of balance sheet wealth that they can tap into for down payments,” Sullivan said.
During March, home resales increased a revised 6.6 percent to an annual rate of 4.20 million, originally reported as a 6.9 percent gain from a month earlier.
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In its report this week, the NAR also reported that the average price of a previously owned home increased 1.8 percent to $142,600 in April from $140,100 in March.
Also this week, the National Association of Business Economists said its members expect the U.S. economy to grow about 2.5 percent this year and 2.1 percent in 1997.
That’s higher than the NABE’s estimate of a 1.9 percent growth rate for 1996 when panel members were last surveyed in February. Since then, government figures showed the gross domestic product grew at a greater-than-expected 2.8 percent annual rate during the first quarter, suggesting businesses and consumers weathered the effects of severe winter storms and higher interest rates.
In 1995, the economy grew 2.0 percent, the weakest annual performance since the 1991 recession.
Consumer prices will probably increase 3.0 percent both this year and next, the survey said. Panel members “expected that much of the recent rise in inflation — caused by rising oil and grain prices — will be reversed over the remainder of this year and next,” the NABE said.