Job growth continues as fears of rising inflation fade
ANN ARBOR, Mich.—Consumer confidence rose in the June 2004 survey, regaining the entire loss recorded in May. "The overall level of consumer confidence has been quite favorable during the first half of 2004. In only 11 out of the past 52 years have consumers been more confident, with nearly all of these instances clustered in the early 1960s and late 1990s," according to Richard Curtin, the Director of the University of Michiganís Surveys of Consumers. So why isnít the economy described in more glowing terms when confidence is now higher than anytime from 1967 to 1996 with the sole exception of the first half of 1984? Curtin suggests several reasons, including the higher performance standards that are now used by consumers, higher uncertainty largely due to noneconomic factors, and divergent trends in future prospects for jobs, inflation and interest rates.
"Juneís renewed sense of confidence was due to job gains that more than offset the impact of anticipated increases in prices and interest rates," Curtin noted. Recent increases in employment were reported by the highest proportion of consumers in more than two decades. More importantly, consumers expected the economy to continue to create new jobs during the year ahead at the same higher recently recorded. "Anticipated gains in jobs and wages will continue to support a strong expansion in consumer spending during the year ahead," Curtin added.
The Index of Consumer Sentiment was 95.6 in the June 2004 survey, up from 90.2 in May and the 89.7 recorded last June. The Expectations Index, a closely watched component of the Index of Leading Economic Indicators, was 88.5 in the June 2004 survey, up from 81.6 in May and the 86.4 recorded a year ago.
Although consumers are now convinced that the upward spiral in gas prices has ended, the majority of consumers are uncertain about how fast and how much those prices will decline. "Consumers expected an inflation rate of 3.3% during the year ahead in the June survey, which was unchanged from the May survey but up significantly from the 2.1% recorded a year ago," according to Curtin.
Interest rates were expected to increase by record numbers of consumers in the June 2004 survey. The immediate impact of this expectation was for consumers to view the current level of mortgage rates more favorably and thus boost sales. "More consumers cited the advantage of obtaining a mortgage in advance of any additional increases in interest rates in the past few months than at any other time during the past ten years," said Curtin.
Evaluations are about change, and consumers now use an improbably high comparison standard that is based on the all-time peaks recorded in the first half of 2000improbably high since most observers describe the performance of the economy at that time as extraordinary and unsustainable. It is only by comparison to that era of exuberance that current economic conditions pale. Nonetheless, the high level of confidence has been amply demonstrated by the extraordinary pace of consumer spending in the face of terrorism, war and uncertain energy supplies. "Consumer confidence remains strong enough to continue to support a robust expansion in consumer spending during the year ahead, even as interest rates are pushed moderately higher by the Fed," Curtin concluded.