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October 28, 2005

October consumer confidence falls again

ANN ARBOR., Mich.—Following the substantial plunge in confidence in September, the October survey recorded a small additional decline, pushing the confidence index to its lowest level in thirteen years. "The continuing decline in October was due to the cumulative strain of higher prices on the financial situation of consumers," according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. "The current outlook for higher costs of home heating, higher interest rates, and falling real incomes will cause cutbacks in consumer spending in the coming months," noted Curtin. Based on the survey data, Curtin expected the growth rate in real consumption spending to be about 1% in both the 4th quarter and in the 1st quarter of 2006.

The Index of Consumer Sentiment was 74.2 in the October 2005 survey, down from 76.9 in the prior month and 96.5 three months ago. The three-month decline of 22.3 index-points was the second largest on record. The largest decline (-24.2 index-points) was associated with the 1990 recession; somewhat smaller threemonth declines were recorded prior to the 2001 recession (-17.0) and the 1980 recession (-15.2). The largest three-month decline that did not result in recession was 11.3 index points following the 1987 stock market crash. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 63.2 in the October survey, just below the 63.3 in September, but well below the 85.5 recorded three months ago. The three-month decline of 22.3 was the second largest in the survey’s history; the largest was the 26.4 index-point decline associated with the 1990 recession. A pause in the pace of the downward decline is typical of past recessionary episodes. The pause reflects a period of time when consumers attempt to gauge the true extent of the weakness in the economy, and thus determine how they should revise their expectations.

Higher prices have devastated consumers’ financial situation. More than one-third of all consumers reported that their finances had worsened in the October survey. "When consumers were asked to explain their situation, more consumers cited higher prices than any time since 1982, and just as importantly, the fewest consumers cited income gains in more than a decade," according to Curtin. Moreover, consumers expected the smallest financial gains in more than a dozen years. "Consumers expected a persistently high inflation rate would result in the smallest gains in their living standards in more than a dozen years," Curtin said.

Favorable home buying attitudes fell to their lowest level since 1990, with more consumers complaining about high home prices than any time since 1982. Vehicle buying attitudes fell to their lowest level in a dozen years, with more consumers citing high gas prices than any time since the late 1970's. Disappearing price discounts and heightened uncertainty about future job and income prospects were the main reasons given by consumers for their lower buying plans for furniture, appliances, home electronics and other household durables.

Institute for Social Research

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