US consumer sentiment ebbed in August and residential construction rose less than expected last month, potentially dimming hopes of an acceleration in economic activity in the third quarter.
Data suggested a recent spike in interest rates, in anticipation of the Federal Reserve tapering its massive bond purchases as early as next month, was starting to impact households. The Thomson Reuters/University of Michigan’s preliminary reading on the overall index on consumer sentiment slipped to 80.0 from July’s six-year high of 85.1. August’s reading was the lowest in four months.
“People have been shocked by how much mortgage rates have risen in the past couple of months,” said Christopher Low, chief economist at FTN Financial in New York. “I think we will see an increasingly cautious consumer in the second half.”
Against the backdrop of higher mortgage rates, consumers were less upbeat about housing in August, the survey showed.
Rising borrowing costs also appear to be making builders cautious about new projects. Housing starts rose 5.9 per cent to a seasonally adjusted annual rate of 896,000 units, the Commerce Department said in a separate report. While that was a recovery from June’s decline, it was below economists’ forecasts.
“I think we are looking at a situation where some air is coming out of the housing recovery given the higher mortgage rates,” said Michael Hanson, senior economist with Bank of America Merrill Lynch in New York.
Long-term interest rates have risen by more than a full percentage point over the past three months on the view that the Fed will soon start trimming the $85 billion in monthly bond purchases it has been making to keep borrowing costs low and stimulate the economy. That in turn has prompted a rise in mortgage rates, which threatens to sap some of the strength from a housing recovery that has been pushing prices higher for more than a year.
In July, future home construction permits jumped 2.7 per cent in July to a 943,000-unit pace. The increase was a touch below economists’ expectations for a 945,000-unit pace.
Daniel Silver, an economist at JPMorgan in New York, said the July housing starts made it less likely residential investment would reach the 17 per cent annual pace. Hitting that target is one of the assumptions underpinning JPMorgan’s 2.5 per cent GDP growth estimate.
July data on industrial production, residential construction and employment have missed market forecasts. The economy grew at a 1.7 per cent pace in the second quarter. Aside from higher mortgage rates, the residential construction figures last month could also be a reflection of supply constraints. Builders have been complaining about a shortage of labour and materials.
Still, the fundamentals for housing remain favourable. With permits outpacing starts, economists expect residential construction to continue rising and again contribute to economic growth this year.
A report on Thursday showed confidence among single-family homebuilders neared an eight-year high in August, with builders fairly upbeat about sales prospects over the next six months.
“As anecdotal evidence suggests, builders may be holding back on new construction in part to reap the benefits of higher prices,” said Guy Berger, an economist at RBS in Stamford, Connecticut.