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September 30, 2005

 

Record plunge in consumer confidence in September

ANN ARBOR, Mich,—Consumer confidence plunged in September to its lowest level in more than a dozen years. "High gas prices had a devastating impact on consumers' budgets and caused consumers to expect a worsening financial situation during the year ahead,” according to Richard Curtin, the Director of the University of Michigan's Surveys of Consumers. Over the past fifty years, such steep and widespread declines in confidence have typically triggered recessions. "Among the prior declines that sparked recessions, the most comparable situation was in August of 1990, when consumer confidence fell from the about the same level, by about the same amount, and prompted by the same steep increases in gas prices,” noted Curtin. The key issue is whether the rise in Federal spending due to Katrina and Rita will be sufficient to offset the decline in consumer spending. "While the economy may not be technically falling into recession, the data indicate that consumer spending will weaken in the months ahead,” said Curtin.

The Index of Consumer Sentiment was 76.9 in the September 2005 survey, down from 89.1 in August and 96.5 in July. The one month decline of 12.2 points equaled the largest monthly decline recorded since 1978; the combined August and September decline was the largest two month decline on record, falling a total of 19.6 Index-points. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell to 63.3 in September, down from 76.9 in August and 85.5 in July. The one-month decline was the second largest and the two-month decline was the largest in the survey's history.

Consumers expected an inflation rate of 4.3% during the year ahead in September, a substantial jump from the 3.1% recorded in August, and the highest inflation rate expected since 1990. More than one-third of all consumers reported that their financial situation had worsened, with one-in-four households citing higher prices as the prime reason. More importantly, in the September survey consumers held the least favorable financial prospects for the year ahead in more than a decade. "Just one-third of all consumers in the September survey expected their financial situation to improve during the year ahead,” noted Curtin.

When asked about prospects for the year ahead, more consumers expected the economy to worsen than at any other time since 1990. Of greater consequence to their financial situation, nearly half of all consumers expected the national unemployment rate to rise during the year ahead. Overall, two-thirds of all consumers expected bad times financially in the national economy during the year ahead, which represents an increase of 20 percentage points from last month. "The one expectation that has not changed was the virtual consensus among consumers that interest rates would continue to rise in the year ahead,” Curtin said.

Vehicle and home buying attitudes fell to ten-year lows in September. The decline in vehicle buying plans was due to heightened uncertainty about future gas prices, cited by the largest proportion of consumers since the 1979 surge in gas prices, which overwhelmed the appeal of price discounts. The decline in home buying plans was due to an increasingly negative reaction to high home prices, as consumers expressed in September the least favorable assessment in nearly a quarter century.

Related Link: Institute for Social Research

Contact: Richard T. Curtin, Director Surveys of Consumers
Phone: (734) 763-5224