Sep. 5, 2006
Consumer confidence weakens: pace of decline slows significantly in late August
ANN ARBOR, Mich.—Although consumer confidence declined in August from the July level, the survey recorded a significant rebound in confidence in the last half of the month. The rebound was mainly due to the decline in gas prices since the start of August. “Despite the remarkable resilience of consumers, the data does not indicate a renewed upsurge in consumer spending but that consumers will remain cautious spenders rather than engage in sharp recessionary cutbacks,” according to Richard Curtin, the Director of the University of Michigan’s Survey of Consumers. The clear exception involved housing. “Consumers held the least favorable home buying plans since the low point in the 1990 recession, which indicates continued declines in sales of new and existing homes during the year ahead,” Curtin noted. The latest data on consumer confidence is consistent with a growth rate in real consumption expenditures that averages about 2½% over the next four quarters.
The Index of Consumer Sentiment was 82.0 in the August 2006 survey, down from 84.7 in July, and significantly below the 89.1 recorded in August of 2005. The entire August decline was in expectations for future economic conditions, as the Current Economic Conditions Index rose slightly to 103.8 in August from 103.5 in July. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell to 68.0 in August from 72.5 in July and 76.9 in August of 2005.
Most of the rebound in late August involved a reduction in expected inflation and a small upward revision in the anticipated pace of economic growth. “Even after the late August changes, consumers still expected an inflation rate of 3.8% during the year ahead, and still anticipated the ongoing slowdown in the pace of economic growth would continue,” noted Curtin.
The primary concerns of consumers about the ongoing slowdown in economic growth were the creation of fewer new jobs and an increasing unemployment rate during the year ahead. Four-in-ten consumers expected the unemployment rate to increase during the next four quarters.
Consumers reported growing weaknesses in their personal financial situation. “The corrosive impact of inflation on their finances is still the top problem cited by consumers,” Curtin said. Consumers voiced even greater pessimism about future changes in the financial situation. Just 29% of all households thought that their finances would improve during the year ahead in August; the lowest level since the 1990 recession.
“Consumers are much more concerned about the potential for persistently high inflation than about the potential impact of some additional increases in interest rates,” according to Curtin.
Although home buying plans fell to the lowest level since 1990 in August of 2006, most of the decline was recorded by mid 2005, well in advance of the declines in home sales. “The recent declines in home prices as well as mortgage rates have been reported by consumers, but the declines have not been judged sufficient to adopt more favorable home buying plans,” Curtin said.
Further Information: Richard T. Curtin, Director Surveys of Consumers