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May 27, 2005

Back to the future: Weakened financial prospects and record home sales

ANN ARBOR, Mich.—Consumer confidence posted a small decline in May, marking the fifth consecutive monthly decline, with the Sentiment Index falling to its lowest level since April 2003. "Although a small loss was recorded for the month as a whole, the data clearly indicate that the decline in confidence ended in the second half of May," according to according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers in the Institute for Social Research.

To be sure, consumers are still very much concerned about rising interest rates and weakening job prospects, but consumers no longer expect additional increases in gas prices. "There is a considerable degree of uncertainty among consumers about when and by how much gas prices will actually decline," according to Curtin. Although gas prices have declined from their peaks, they are still high enough to strain the finances of American households. The data indicate that overall growth in real spending will ease to 3a%during the balance of 2005, down from 3.6% in the first quarter of 2005.

The Index of Consumer Sentiment was 86.9 in the May 2005 survey, down from 87.7 in April and 90.2 in May 2004, falling to its lowest level since April of 2003. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell to 75.3 in May 2005, down from 77.0 in April and 81.6 in May 2004. The Current Economic Conditions Index was 104.9 in May 2005, just ahead of the 104.4 recorded in April and the 103.6 in May 2004.

The proportion of households that reported an improved finances fell to 40% in May, down from 50% three months ago. More importantly, just one-third of all consumers expected their finances to improve during the year ahead, unchanged from April, remaining at the lowest level recorded during the past ten years. These weakened financial prospects were due to a higher inflation rate rather than slower expected income growth.

Consumers were evenly split about whether the pace of economic growth would accelerate or slow during the year ahead. Small increases rather than additional declines in the unemployment rate were expected by a two-to-one margin in the May survey. "It would appear that consumers’ uncertainty is more about the timing rather that the direction of future change in the economy, as the highest proportion in a decade now expect an economic downturn sometime during the next five years," noted Curtin.

Home sales have again reached new peaks as consumers have seamlessly shifted from the irresistible enticement of record low mortgage rates to the equally irresistible temptation of purchasing in advance of rising mortgage rates and home prices. More consumers favored buying homes in advance of anticipated increases in mortgage rates and prices in the May survey than at any other time in the last decade. "Attitudes toward home buying conditions have recently displayed nearly all of the characteristics of earlier bouts of advance buying, a reaction that has typically generated an economic bust following an extended boom," Curtin said. The last time the survey recorded a comparable number of references to advance buying was in 1988-89, more than two years before home prices began to decline in some areas of the country.

Related links:
Surveys of Consumers

Institute for Social Research

Contact: Richard T. Curtin
Director, Surveys of Consumers
Phone: (734) 763-5224
E-mail: curtin@umich.edu