MNI INTERVIEW: Consumers Can Take Fed Hikes - Conference Board

American consumers are likely to be able to withstand a series of larger interest rate increases from the Federal Reserve without too much pain even as they will continue to lower their expectations for the economy and cool spending in coming quarters, Conference Board economist Lynn Franco told MNI.

"At least right now, we're not seeing any indications that would point towards a recession," she said about fresh Conference Board statistics on consumer confidence for April. "We will continue to see fluctuations, which is normal, but as long as we have strong labor market growth, we should be able to maintain these levels."

"What we're seeing is that consumer confidence is holding relatively steady. We did see a little bit of a decline in consumers assessment of the present situation, but that still remains at a very strong level, which signals that the economic expansion is continuing," said Franco, who is director of consumer indicators and surveys at the Conference Board.

American consumer expectations declined sharply when the war in Ukraine broke out but those losses have been curtailed, she said. "Despite the war in Ukraine, despite rising prices, consumers remain relatively cautiously optimistic in their outlook" and "confidence is being supported by a stronger labor market that has helped offset negative implications from rising prices."

The Conference Board's survey of consumer confidence dipped in April to 107.3 from 107.6, but Americans signaled they are optimistic enough about the economy to keep buying big-ticket items such as new cars, appliances, and houses, despite their 12-month-ahead price expectations at still near-record highs at 7.5%. A similar confidence gauge that looks ahead six months rose to 77.2 from 76.7, indicating a bit more cautious optimism about the future path of the economy.

SOFTENING DURABLES

The Federal Reserve is signaling it will sharply raise interest rates by the end of the year to contain inflation with markets looking for a series of front-loaded supersized 50bp increases. Chair Powell last week said he is putting a 50bp move "on the table" at next week's FOMC meeting.

"Consumers are well aware that interest rate hikes are on the horizon and we've seen that also translate into a little bit of softening in terms of the durable items that we asked about," Franco said. "Their intentions to purchase aren't as strong as they were at the beginning of the year and some of these big ticket items will soften a bit over the coming months. We actually have spending softening in Q2 and Q3, before picking back up a little bit in Q4."

Yet, while the U.S. central bank appears likely to quicken the rate-hiking cycle to one of the fastest in decades, consumers are very optimistic about current employment conditions and about their future job prospects. "As long as we continue to see strong employment growth it should be enough to support consumer confidence over the coming months," Franco said.

Other confidence measures suggest consumers are much more gloomy, with a record gap between Conference Board indicators and the University of Michigan's consumer sentiment index that has fallen rapidly in recent months. The Conference Board measure focuses more on the labor market while Michigan is more impacted by inflation, Franco said.

"Confidence will go the way the labor market goes," Franco said. "Right now we're not seeing any indications that would point towards a recession in the six-month window."