ANN ARBOR—Consumer optimism rose last month to its second-highest level since 2007—only below the January 2015 level, according to the University of Michigan Surveys of Consumers.

Conducted by the U-M Institute for Social Research since 1946, the surveys monitor consumer attitudes and expectations. The data are available non-exclusively via Bloomberg.

The Sentiment Index has recorded a higher average level during the past five months than anytime since May 2004, according to U-M economist Richard Curtin, who directs the surveys. Although recent gains in jobs and incomes have prompted the most favorable personal financial expectations in eight years, consumers’ assessments of their financial situation are still far below the peaks recorded in earlier decades.

Consumer optimism has become increasingly dependent on the persistence of low inflation and low interest rates as well as slowly improving prospects for jobs and incomes. Despite a slower pace in the 1st quarter, personal consumption spending is expected to post a 3 percent gain in 2015.

“While nearly two-thirds of all consumers anticipate rising interest rates during the year ahead, they nonetheless expect very minimal increases,” Curtin said. “For a successful Fed policy, consumers must judge whether the negative impact of higher interest rates will be easily offset by the positive impact of expanding jobs and incomes.

“That tradeoff accompanied rate hikes in the past, but it has never been undertaken when interest rates have been so low for so long. Along with other changes in consumer evaluations that have recently occurred, consumers are likely to have become more responsive to much smaller changes in interest rates than in the past.”

Personal Finances Post Significant Improvement
Personal financial gains were expected by 37 percent of all consumers in the April survey, the highest proportion since April 2007. The improvement was due to both higher income expectations as well as more job opportunities, although the anticipated gains in incomes and jobs remained quite modest. Record-low inflation expectations meant that consumers expected improved living standards during the year ahead as inflation-adjusted income gains were expected more frequently than since 2006.

Home Selling Boosts Home Buying
Since most home buyers must sell their current home, it was the significant improvement in home-selling conditions in April that will have a critical influence on improving future home sales. Among all consumers, 58 percent reported favorable home-selling conditions, the highest percentage since May 2006. Rising home prices, low interest rates and gains in the value of the homes they owned all contributed to the improvement.

Consumer Sentiment Index
The Sentiment Index was 95.9 in the April 2015 survey, up from 93.0 in March and significantly above last April’s 84.1. The Current Conditions Index was 107.0 in April, up from 105.0 in March and well above last year’s 98.7. The Expectations Index rose slightly to 88.8 in April from 85.3 in March, but posted a substantial gain from last March’s 74.7.

The Survey of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95-percent level in the Sentiment Index is 4.8 points; for Current and Expectations Indices the minimum is 6.0 points. Surveys of Consumers: umich.edu/~umsurvey

Established in 1949, the University of Michigan Institute for Social Research is the world’s largest academic social science survey and research organization, and a world leader in developing and applying social science methodology and in educating researchers and students from around the world. Visit: isr.umich.edu