Resilient consumers remain engine of expansion
ANN ARBOR-Mich.,—Consumer confidence fell slightly in August due to greater concerns about the sluggish pace of growth in employment. “Consumers have proved to be remarkably resilient in the face of a wide range of adverse economic developments. Despite higher gas prices, sluggish job growth, and rising interest rates consumer confidence has remained largely unchanged during the past three months,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. The overall level of the Sentiment Index in the August survey was nearly identical to its average since the start of 2004. “Just as earlier in the expansion, consumers will continue to be the engine of economic growth during the year ahead,” Curtin said.
The Index of Consumer Sentiment was 95.9 in the August 2004 survey, between the 96.7 in July and the 95.6 in June. The Expectations Index, a closely watched component of the Index of Leading Economic Indicators, was 88.2 in August , just below the 91.2 in July and 88.5 in June. Compared with a year ago, the Sentiment Index posted a 7.4% gain, and the Expectations Index was up by 6.9%.
Consumers reported hearing much less favorable news about employment growth in the August survey. “The recent payroll report came as a surprise to consumers, shifting their perceptions from a positive to a negative view of changes in employment,” Curtin noted. In only nine other surveys conducted during the past fifty years was a larger change recorded in reports of net job gains. While consumers lowered the pace of economic growth they anticipated during the year ahead, there was no change in longer term economic prospects, suggesting that consumers judge the job gains as temporally postponed, not forgone.
Despite persistently high gas and food prices, consumers now anticipate that the overall level of inflation will begin to recede during the year ahead. “During the past two months consumers have cut the inflation rate they expect by half a percentage point. Consumers now expect an inflation rate of 2.8% during the year ahead, down from 3.3% in May and June,” according to Curtin. Even among lower income households, complaints about higher prices fell by one-third in the August survey; although the reported burden is still higher than among upper income households.
“The level of confidence is positive enough to be consistent with the reelection of Bush but the change in confidence during the past four years is negative enough to be consistent with the election of Kerry,” Curtin noted. The Sentiment Index is now nearly identical to the level recorded just prior to Clinton’s reelection in 1996 as well as the successful reelections of Reagan in 1984, Nixon in 1972, and Eisenhower in 1956. In comparison, the reelection losses of Bush in 1992 and Carter in 1980 shared two common elements: the Sentiment Index was relatively low just prior to the election (72.0) and it was substantially below the levels recorded four years earlier (-20.9 Index-points). The current data indicate a sharp divergence between the positive level of confidence (95.9) and the negative change compared with four years ago (-11.4 Index-points). Never before in the long history of the surveys has a President faced reelection with such a divergence between favorable levels and unfavorable changes in confidence. “This split will insure that whatever the outcome, the claim that the economy was decisive will be proved correct!” Curtin noted.