US consumer sentiment deteriorates in March, inflation expectations
retreat
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[March 18, 2023] By
Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer sentiment fell for the first time
in four months in March, but households expected inflation to subside
over the next year and beyond, which could offer some relief to the
Federal Reserve as it confronts financial market instability.
The ebb in sentiment reported by the University of Michigan on Friday
occurred before the recent collapse of two regional banks, which sparked
fears of contagion in the banking sector. Worries about a banking crisis
against the backdrop of data this month showing a still-tight labor
market and stubbornly high consumer prices in February have put the Fed
in a tight spot.
"Inflation expectations are falling, giving the Fed some flexibility in
the future path of rate hikes," said Jeffrey Roach, chief economist at
LPL Financial in Charlotte, North Carolina. "The Fed now has two serious
concerns over financial stability and persistent inflation."
The University of Michigan's preliminary March reading on the overall
index of consumer sentiment came in at 63.4, down from 67 in the prior
month. Economists polled by Reuters had forecast a preliminary reading
of 67.0. Joanne Hsu, the director of the University of Michigan's
Surveys of Consumers, said 85% of the interviews for the report had been
completed prior to the collapse of Silicon Valley Bank.
Economists expect sentiment to deteriorate further when the final survey
is published later this month. The California bank's collapse, together
with the failure of Signature Bank in New York and problems at Credit
Suisse, have triggered a global stock market sell-off.
The decline in sentiment was concentrated among lower-income,
less-educated and younger consumers, as well as consumers with the top
tercile of stock holdings. While the correlation between consumer
sentiment and spending is weak, economists expect tighter financial
conditions will undercut consumption and push the economy into
recession.
The risks to the economic expansion are rising. A separate report from
the Conference Board showed its Leading Economic Index, a gauge of
future economic activity, dropped for an 11th straight month in
February.
"The leading index is far from a perfect guide, but on past form it
points to a roughly 1.0% contraction in GDP by the second half of the
year," said Gurleen Chadha, a U.S. economist at Oxford Economics in New
York.
The University of Michigan survey's reading of one-year inflation
expectations fell to 3.8%, the lowest since April 2021, from 4.1% in
February. Its five-year inflation outlook dropped to 2.8%, falling below
the narrow 2.9%-3.1% range for only the second time in the last 20
months.
Financial markets expect the Fed to raise interest rates by another
quarter of a percentage point next Wednesday, according to CME Group's
FedWatch tool. Banking sector instability has, however, prompted some
speculation that the central bank could pause its most aggressive
monetary policy tightening campaign since the 1980s.
The Fed has raised its benchmark overnight interest rate by 450 basis
points since last March from the near-zero level to the current
4.50%-4.75% range.
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A U.S. Pipe factory is seen in Bessemer,
Alabama, U.S., February 23, 2022. REUTERS/Elijah Nouvelage/File
Photo
U.S. stocks were trading lower. The dollar slipped against a basket
of currencies. U.S. Treasury prices rose.
MANUFACTURING OUTPUT RISES
While other data on Friday showed production at factories edged up
in February and output in the prior month was stronger than
previously thought, manufacturing continued to struggle under the
weight of higher borrowing costs.
Manufacturing output gained 0.1% last month, the Fed said. Data for
January was revised up to show production at factories increasing
1.3% instead of the previously reported 1.0% rise. Output fell 1.0%
on a year-on-year basis in February and was on track to contract for
a third straight quarter.
Manufacturing, which accounts for 11.3% of the U.S. economy,
contracted in the third and fourth quarters of 2022 as higher rates
undercut demand for goods, which are typically bought on credit.
Spending is also shifting away from goods to services, while the
dollar's past appreciation and sluggish global growth are curbing
exports. Restocking by businesses is also slowing.
The Institute for Supply Management's measure of national
manufacturing activity has contracted for four straight months.
Though activity appeared to stabilize at weaker levels in February,
a rebound is unlikely. Regional Fed surveys this week showed
manufacturing in New York state and the mid-Atlantic area remained
depressed in March.
Last month, there were increases in the output of consumer goods,
defense and space equipment and materials. But production of
business equipment, construction supplies and business supplies
declined. Durable manufacturing production nudged up 0.1%, while
nondurable manufacturing output climbed 0.2%.
Mining output fell 0.6%, with oil and gas well drilling dropping
3.1%. Mining production had increased 2.0% in January, ending three
straight monthly declines.
Utilities production rebounded 0.5% after plunging 10.1% in January
as unseasonably mild temperatures curbed demand for heating. The
small gain in manufacturing, together with the rise in utilities,
offset the drop in mining, leaving overall industrial production
unchanged last month. Industrial output rose 0.3% in January.
Capacity utilization for the manufacturing sector, a measure of how
fully firms are using their resources, dipped 0.1 percentage point
to 77.6% in February. It is 0.6 percentage point below its long-run
average. Overall capacity use for the industrial sector was
unchanged at 78.0%. It is 1.6 percentage points below its 1972-2022
average.
"At this point we can be fairly certain that the manufacturing
sector is in recession," said Conrad DeQuadros, senior economic
advisor at Brean Capital in New York.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Paul Simao)
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