A Potential Budget; A Dip in Consumer Confidence

Late yesterday, House Republicans were successful in pushing through at least a “blueprint” of their latest budget. The budget, passed 217 to 215, includes a framework that calls for $4.5 trillion in tax cuts over the next decade, as well as $2 trillion worth of spending reductions, including significantly reducing Medicaid costs. It also calls for funding to secure the border, as well as a boost to military spending, while also raising the debt limit by $4 trillion.

The victory has some supporters hopeful that a Republican-controlled Congress may be able to deliver on some of the administration’s priorities, despite very slim majorities in both the House (218 vs. 215) and the Senate (53 vs. 45). Of course, as Bloomberg News points out, even if legislators agree to a budget, there will still be a plethora of negotiation needed on everything from taxes to healthcare to domestic energy policy before reaching the President’s desk.

Yesterday on the economic calendar, the Conference Board’s Consumer Confidence Index dropped more than expected, falling seven points to a reading of 98.3 in February, an eight-month low. February’s seven-point decline marks the largest monthly drop since August 2021. According to the median forecast, the index was expected to decline to a reading of 102.5. In the details of the report, a gauge of current conditions declined 3.4 points from 139.9 to 136.5, and a gauge of future expectations slumped 9.3 points from 82.2 to 72.9 in February, marking the largest monthly drop in three-and-a-half-years and the lowest reading since June.

Bottom Line: Dropping the most since Q3 2021, the sizable dip in confidence at the start of the year largely appears to be a reflection of consumers’ growing frustration with ongoing elevated prices, as well as heightened uncertainty over a potentially aggressive fiscal policy agenda coming down the pipeline. After years of suffering under the weight of rising prices, the threat of further inflation potentially resulting from a plethora of policy initiatives, including tariffs, has consumers questioning the outlook for the economy as well as individual financial viability, a trepidation which has already led to a pullback in consumer activity. At this juncture, the loss of momentum may still prove temporary. The risk, however, is a more sustained slowdown in activity which could undermine broad-based growth near term.

Investors appear to be bracing for the less optimistic scenario, driving longer-term rates lower and amping up calls for further Fed action within the next ten months. According to Bloomberg, the market now anticipates two to three rate cuts by year-end with the 10-year closing at 4.295% yesterday, the lowest since mid-December. This morning, the 10-year is roughly unchanged at 4.301% as of 9:50 a.m. ET.

Also on the economic calendar, yesterday, an updated look on housing showed the FHFA House Price Index rose 0.4% in December, a tenth of a percentage point more than expected and following a similar increase in November. Over the past 12 months, the FHFA House Price Index rose 4.7%, a two-month high.

Additionally, the S&P Case-Shiller 20 City Home Price Index rose 0.52% in December, surpassing the 0.40% gain expected and marking the largest monthly increase since February 2024. Additionally, the National Home Price Index rose 0.46% in December, also marking the largest monthly gain since February 2024. Over the past 12 months, the 20-city index increased 3.96%, the largest annual gain since August, while the national index gained 4.53%, the largest annual increase in three months.

Finally, yesterday, the Richmond Fed Manufacturing Activity Index unexpectedly rose ten points to a reading of +6 in February, the highest reading since April 2022 and following 15 consecutive months of a negative print. According to the median forecast, the index was expected to rise one point to -3.

In the details of the report, new orders increased four points to a reading of 0, shipments jumped from -9 to +12, and employment rose six points to a reading of +9, the highest reading since August 2022. On the other hand, wages ticked down one point to +21 in the second month of the year, a two-month low.

This morning, MBA mortgage applications fell 1.2% in the week ending February 21 following a 6.6% decline the week prior. The 30-year mortgage rate, meanwhile, fell 5bps to 6.88%, the lowest since mid-December.

Additionally, this morning, new home sales plunged 10.5% in January from 734k (revised up from 698k) to 657k, a three-month low. According to the median forecast, sales were expected to only decline 2.6% at the start of the year.

On a regional basis, sales in the Northeast fell 20.0% with sales declining 16.7% in the Midwest, and 14.8% in the South. Sales rose, however, 7.7% in the West at the start of the year. Over the past 12 months, new home sales fell 1.1%, the largest annual decline in three months. Due to a fall in new sales, the months’ supply of new homes rose from 8.0 to 9.0 months, the highest in three months. From a price standpoint, the median cost of a newly constructed home rose 7.5% from the month prior to $446k, up from $415k in December. Year-over-year, new home prices rose 3.7% in January.

Tomorrow, we turn to weekly jobless claims, and the first highlight of the week – the second-round Q4 GDP report.

In the preliminary report, GDP rose 2.3% in the fourth quarter, less than the 2.6% gain expected and marking the slowest pace of growth in three quarters. In the second-round Q4 report, GDP is expected be unrevised at 2.3%.

Also tomorrow, the January durable goods order report will be released. After unexpectedly dropping 2.2% in December, durable goods orders are expected to rise 1.2% in January, potentially marking the largest gain in six months. Over the past 12 months, durables are expected to move back into the black, up 0.1% following two consecutive months of decline.

Additionally tomorrow, we’ll take a look at pending home sales and the February Kansas City Fed Manufacturing Index

We’ll wrap up the week, on Friday with another key report, looking at January personal income and consumption, along with the latest read on the PCE – the Fed’s preferred inflation gauge.

Personal consumption is expected to rise 0.3% in January and 5.9% on an annual basis, a potential uptick from the 5.7% annual gain in December, and still within the average established since June 2023. Income, meanwhile, is expected to rise 0.3% in January and 4.2% year-over-year, down from the 5.3% annual gain in December, although still perpetuating an average pace of over 4% since the start of 2024.?

On the inflation front, the PCE is expected to rise 0.3% in January, matching the increase the month prior, and 2.5% on an annual basis, potentially marking a one-tenth of a percentage point decline from the pace reported in December. Stripping out food and energy, the core PCE is expected to rise 0.3% in January, a potential uptick from a more muted 0.2% gain the month prior, and 2.6% year-over-year, potentially marking a two-tenths of a percentage point decline from the pace reported in December and the smallest annual gain since June. A welcome step in the right direction following a disappointing headline rise in both the January read of the CPI and the PPI.

Also on Friday, the February Chicago PMI Index will be released.

-Lindsey Piegza, Ph.D., Chief Economist