The Virginia Index of Consumer Sentiment (VAICS) lost momentum in the third quarter of 2023, falling 2.2 points to 69.2. Virginians express frustration with high prices despite slowing inflation, rising wages and strong labor markets. The national inflation rate was 3.3% in July 2023, down more than five and a half percentage points since the highs of June 2022. Nationally, wage growth now outpaces price growth; wages rose 4.6% over the last 12 months. The national unemployment rate remains low at 3.5% in July; in Virginia, the rate is even lower at 2.7% in June, with 2.5 job openings for every unemployed person.
Consumer sentiment slipped 2.2 points in the third quarter of 2023 to 69.2 but remained well above the historic low of 58.2 in May 2022. The primary driver behind the sentiment slowdown is high price levels despite slowing inflation (the growth rate of prices), rising wages 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 (8.9%). Since then, inflation has rolled over and was 3.3% (seasonally adjusted) in July 2023. However, inflation measures the growth rate of prices, so while prices are not growing as quickly as a year ago, price levels are still higher than in the past. The price pressures are a headwind to sentiment compared to the tailwinds of rising wages and a strong labor market. Wage growth now outpaces price growth, allowing for consumer purchasing power to increase. Nationally, wages increased 4.6% over the last year while benefits rose 4.2% over the same period.
In addition to wage growth outpacing price growth, another tailwind to sentiment is the strong labor market. Nationally, the July unemployment rate was 3.5%, equal to its pre-pandemic value; the rate in Virginia is 2.7%. 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, both unchanged over the last quarter. Another way to think about this statistic 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 0.4% between May and June 2023, fueled by spending on goods rather than services.
The VA Index of Current Conditions (VA ICC) is 61.4, up 0.7 points since the last quarter, its third consecutive quarter of growth, although still well off its pre-pandemic February 2020 value of 103.5 and the historic high of 106.6 in February 2019. Only a quarter of respondents report that their finances are better today than a year ago, despite increased average home values and incomes. Thirty-two percent of respondents believe now is a good time to purchase large, durable goods like refrigerators. Prices of such durable goods fell 1.4% over the last year, compared to a slight decrease in nondurables (-0.2%) and an increase in services (5.7%). Virginians are less optimistic about current conditions than the nation. The preliminary national ICC was 77.4 in August 2023.
Although sentiment is low in the commonwealth, there is relative optimism about the future. The Virginia Index of Consumer Expectations (VA ICE) is 74.2, down 4.0 points since last quarter but almost 7.0 points above the national number of 67.3. About 40% of respondents believe the coming five to 10 years will be a period of economic growth and prosperity, and 35% anticipate improved household finances in the coming year. The optimism is likely linked to low inflation expectations: the 12-month inflation expectation is 3.3% nationally and 3.0% in Virginia.
“Consumer sentiment stalled a bit this quarter, likely due to consumer frustration over high price levels,” says 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 it signals their anticipated consumption patterns now and into the near future. While sentiment fell slightly this quarter, it is higher today than one year ago; a one-period drop does not mean we will stay on that downward path, particularly in light of slowing price growth, strong labor markets and rising wages. The labor market remains resilient and is a tailwind for the economy. The Virginia labor market in particular is tight, with only one unemployed worker for every 2.5 job openings. Consumer spending, which increased nationally by 0.4 percentage points between May and June 2023, remains strong, particularly for goods. Increased consumer spending adds to inflation, but given it makes up two-thirds of total spending in our economy, it is a firewall against a recession. The Federal Reserve Bank of Atlanta’s GDP nowcast for the third quarter is 5.8%, indicating a strong U.S. economy.”
Interviewing for The Roanoke College Poll was conducted by The Institute for Policy and Opinion Research at Roanoke College in Salem, Virginia, between Aug. 6 and Aug. 15, 2023.