March 31, 2006
Consumer confidence rises due to optimism among higher income households
ANN ARBOR, Mich.—Consumer confidence rose in the latest survey largely due to gains among households with incomes above $50,000. “Higher income households much more frequently reported that their finances had improved and more frequently anticipated further gains during the year ahead,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers.
The Index of Consumer Sentiment was 88.9 in the March 2006 survey, between the 86.7 recorded in February and the 92.6 recorded in last March’s survey. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, rose to 76.0 in March, slightly ahead of the 74.5 in February, but well below the 82.8 recorded in March of 2005. The Current Economic Conditions Index was 109.1 in March, up from 105.6 in February and 108.0 in March of 2005.
The March gain in the Sentiment Index among households with incomes above $50,000 was 5.1 Index points, while among households with incomes under $50,000, the Sentiment Index fell by 0.4 Index points. “Upper income households were half as likely as lower income families to report that their financial situation had been significantly weakened by higher prices, and higher income households were three times as likely to anticipate increases in their real incomes during the year ahead,” Curtin noted. The gap in financial prospects between those households with above median incomes and below median incomes has never been wider during the past decade.
There was evidence of a growing belief across all households that the pace of economic growth would slow in the second half of 2006. “Despite the expected slowdown in the pace of growth, most consumers do not expect bad economic times, but they do anticipate that the unemployment rate will begin to inch upward,” according to Curtin. Half of all consumers in the March survey expected an economic downturn sometime during the next five years, however.
“Continued hikes in interest rates were expected by three-in-four consumers in the March 2006 survey, with consumers giving no indication that they think the Fed is finished,” Curtin added. Consumers emphasized the importance of price discounts to their buying plans for everything from homes, to vehicles, to household appliances and furniture in the March survey. These price discounts were seen as critical to offset the higher costs of credit.
While personal consumption expenditures are expected to grow by nearly 3% during 2006, new residential investment is expected to decline. “The critical issue is how much of the weakness in the home market spreads to other purchases via reduced cash-outs of home equity,” said Curtin. The size and frequency of cashouts depend on changes in home prices and mortgage rates, with changes in both expected to limit cash-outs.