Consumer confidence declines in May
ANN ARBOR, Mich.—Consumer confidence declined in the May 2004 survey due to rising inflation and higher interest rates. “Consumers expected the higher inflation rate to weaken their financial situation significantly, and expected higher interest rates to increase the cost of credit and slow the pace of economic growth in the year ahead,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. Importantly, record numbers of consumers also reported hearing about increases in employment in May.
“Rather than a shift toward pessimism, the data show a continuation of the longstanding trend of mixed evaluations of the economy, only this time consumers hold more favorable employment expectations and less favorable inflation and interest rate expectations, the opposite of what occurred during the past few years,” noted Curtin. Confidence remains strong enough to support a healthy expansion in consumer spending during the year ahead, according to Curtin.
The Index of Consumer Sentiment was 90.2 in the May 2004 survey, down from 94.2 in April and the 92.1 recorded last May. The Expectations Index, a closely watched component of the Index of Leading Economic Indicators, was 81.6 in the May 2004 survey, down from 87.3 in April and well below the 91.4 recorded a year ago (when it was unusually high due to the sharp increase in favorable economic expectations surrounding the quick collapse of Iraq’s military.)
“Interest rates were expected to increase by 85% of all consumers in the May 2004 survey, more than ever before recorded in the long history of the surveys,” Curtin noted. The immediate impact of this expectation was for consumers to view the current level of interest rates more favorably. “More consumers in the May 2004 survey cited the advantage of obtaining a mortgage in advance of any additional increases in interest rates than any other time in nearly ten years,” said Curtin.
“Even with the slower rate of economic growth now expected, consumers still anticipated that the pace of economic growth will be strong enough to continue to produce more new jobs,” according to Curtin. Indeed, more consumers than at any other time in the past twenty years reported hearing about increases in employment in the May 2004 survey.
An inflation rate of 3.3% was expected for the year-ahead in May 2004, well above the 2.0% recorded last May. “Consumers thought that the recent hike in the inflation rate was due to special and temporary factors,” according to Curtin. In comparison with the 1.3 percentage point increase in the one-year inflation expectations, consumers did not change their expected inflation rate over the next five-years since last May.
Rising inflation has made consumers less optimistic about their future financial prospects and living standards. “Overall, consumers expected the smallest real income gains in more than five years in the May 2004 survey,” Curtin said.