The Virginia Index of Consumer Sentiment (VAICS) increased by 3.8 points over the second quarter of 2023, its highest value since November 2021. Virginians are increasingly optimistic as inflation continues to slow and labor markets hold strong. The national inflation rate was 5% in April 2023, down four percentage points since June 2022. The strong labor market also contributes to improving sentiment. The national unemployment rate hit 3.4%, the lowest rate since 1969 in January and April 2023; in Virginia, the rate is even lower, coming in at 3.1% in April and with 2.5 job openings for every unemployed person.
Consumer sentiment increased by 3.8 points in the second quarter of 2023 to 71.3, the highest value since November 2021, and continues the rebound since the historic low of 58.2 in May 2022. The primary drivers behind the sentiment recovery are slowing inflation and a resilient labor market. As measured by the Consumer Price Index, which captures the price of goods and services the typical household buys, inflation hit the highest level in more than 40 years in June 2022 (9%). Since then, inflation has rolled over and was 5.0% (seasonally adjusted) in April 2023. Virginians are more optimistic about the economy when the pressures on their wallets lessen. The downward path of inflation has slowed in recent months, suggesting that reaching the Federal Reserve Bank inflation target of 2% will take time.
Regarding sentiment, the slowing of price growth reinforces the strong labor market. Nationally, the May unemployment rate was 3.4%, slightly below the pre-pandemic value of 3.5% and matching the lowest value since May 1969 for the second time in 2023; the rate in Virginia is 3.1%. A comparison of labor supply (households) and labor demand (businesses) shows that the number of unemployed persons is much lower than that of current job openings: the number of unemployed persons per job opening is 0.4 in Virginia compared to 0.6 nationally. Another way to think about this is that there are 2.5 job openings for every unemployed person in Virginia, which indicates that finding workers is challenging for businesses, and workers continue to have bargaining power. The tight labor market and increased minimum wage and social security payments at the start of the year bolstered spending and household income. Consumer spending, adjusted for inflation, rose 0.5% between March and April 2023.
The VA Index of Current Conditions (VA ICC) is 60.7, up 0.5 points since the last quarter, although still well off its pre-pandemic February 2020 value of 103.5 and the historic high of 106.6 in February 2019. Twenty-six percent of respondents report that their finances are better today than a year ago despite increased home values and incomes. Virginians see their wages buying considerably less today than a year ago, holding the ICC back. Thirty-two percent of respondents believe that now is a good time to purchase large, durable goods like refrigerators. Prices of such durable goods fell 0.2% over the last year, compared to an increase in nondurables and services, which increased by 3.2% and 6.8%, respectively. Virginians are less optimistic about current conditions than the nation. The national ICC was 64.9 in May 2023.
Although sentiment is low in the commonwealth, there is relative optimism about the future. The Virginia Index of Consumer Expectations (VA ICE) is 78.2, up 6.0 points since last quarter and almost 23 points above the national number of 55.4. About 43% of respondents believe the coming five to 10 years will be a period of economic growth and prosperity, and 39% anticipate improved household finances in the coming year. The optimism is likely linked to falling price expectations: Virginians expect prices to rise 2.1% over the next 12 months, down from the one-year expectation of 4.3% in May 2022.
Analysis
“Consumer sentiment continues to improve steadily,” said Dr. Alice Louise Kassens, John S. Shannon Professor of Economics and Senior Analyst at the Roanoke College Institute for Policy and Opinion Research. “Consumer sentiment reflects how consumers feel about the economy and can also impact the future. If people are worried about the economy’s future, they may respond by reducing spending in anticipation of tough times. Worries about a recession can become a self-fulfilling prophecy, and we can push ourselves into a recession. The upward sentiment trajectory in the commonwealth signals that residents are optimistic about the economy. The labor market remains resilient and is a tailwind for the economy. The Virginia labor market is tight, with only one unemployed worker for every 2.5 job openings. Although inflation continues as the largest drag on sentiment, it appears to have rolled over and is moving in the right direction, albeit slowly. Consumer spending, which increased nationally by 0.5 percentage points between March and April 2023, remains strong. Increased consumer spending adds to inflation, but given that it makes up two-thirds of total spending, it is a firewall against a recession.”
Interviewing for the Roanoke College Poll was conducted by The Institute for Policy and Opinion Research at Roanoke College in Salem, Virginia, between Feb. 12 and Feb. 21, 2023.
