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Oct. 29, 2004

High oil prices and lagging job prospects
diminish consumer confidence

ANN ARBOR, Mich.—Rising energy prices and concerns about the sluggish pace of job growth caused consumer confidence to fall in the October 2004 survey.

“The overall decline in confidence was small as consumers concluded by the end of October that the surge in gas prices was nearly over and their apprehensions about future job growth lessened,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. Consumers do not believe that the past levels of jobs or gas prices will be regained in the near future. “Few consumers expect significant declines in energy prices anytime soon, and few consumers anticipate the return of robust job growth during the year ahead,” Curtin said. The current middling level of consumer confidence is strong enough to support growth of 3¼% in real consumption spending during 2005.

The Index of Consumer Sentiment was 91.7 in the October 2004 survey, between the 94.2 recorded in September and the 89.6 last October. For the first time since the month before 9/11, the October survey marked the twelfth consecutive month that the Sentiment Index was above 90.0. The Expectations Index, a closely watched component of the Index of Leading Economic Indicators, was 83.8 in October, down from 88.0 in September, and just above the 83.0 recorded in October of 2003.

Consumers less frequently reported hearing news of unfavorable economic developments in October, especially reports of job losses. “Consumers expected the economy to improve rather than worsen during the year ahead by more than a two-to-one margin in the October survey,” according to Curtin. Most consumers, however, anticipated that the pace of economic growth will remain modest, and the majority expected the unemployment rate would remain largely unchanged at its current level during the year ahead.

Consumers did report darkening clouds on the distant horizon. “Most of the concerns reported by consumers in the October survey involved longer term economic prospects,” Curtin noted. Consumers voiced their apprehensions about the health of the economy over the next five years, and for the first time in five months were evenly split between a positive and negative outlook.

Consumers expected a year-ahead inflation rate of 3.1% in October, up from 2.8% in September, and just below the 3.3% recorded in May when gasoline prices last topped $2 a gallon. Higher costs of home heating will add to the drain on discretionary income this winter. “Consumers reported that their personal finances are already stretched by higher gas prices, and have increasingly anticipated smaller gains in their living standards due to high energy prices,” according to Curtin. While holiday spending will be diminished by these drains on discretionary income, holiday spending should still post reasonable gains over last year.

Vehicle buying attitudes improved slightly in October as consumers cited their conviction that manufacturers would continue to offer deep discounts during the year ahead. Home buying attitudes slipped as consumers saw less investment potential and less reason to buy in advance of rising mortgage rates in the October survey. “The data indicate that unit sales of homes and vehicles will remain at very favorable levels in 2005 but fall slightly below the levels recorded during 2004,” Curtin concluded.

Web links:
Surveys of Consumers:
http://www.umich.edu/~umsurvey >

Institute for Social Research:
http://www.isr.umich.edu/ >

Contact: Richard T. Curtin
Phone: (734) 763-5224
E-mail: curtin@umich.edu