Continued expansion but slower growth in living standards expected

August 29, 2003
Contact:
  • umichnews@umich.edu

ANN ARBOR—Consumer confidence has remained largely unchanged in the August 2003 survey for the fifth consecutive month, according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. “Consumers have shown a remarkable degree of resilience during the past five months as they have been steadfast in their confidence that the economy would improve despite an unending military conflict, higher unemployment, blackouts, and more recently, rising gas prices,” Curtin said. Only minor monthly changes have been recorded, with the overall level of confidence remaining above the fifty-year average. “The prevailing favorable views of consumers about their future economic prospects will support a robust pace of consumer spending during the second half of 2003,” according to Curtin. But Curtin noted that “Further acceleration in the spending growth rate during 2004 will depend on renewed and sustained growth in employment.”

The Index of Consumer Sentiment was 89.3 in the August survey, just below the 90.9 in July. Overall, since the surge from the post-war low of 77.6 in March, the Sentiment Index has remained largely unchanged from April to August, averaging 89.6. The small decline recorded in August was due to rising gas prices. The Expectations Index, a closely watched component of the Index of Leading Economic Indicators, fell to 82.5 in August from 83.7 in July. The Expectations Index remained nearly 20% higher than at its low in March 2003.

Consumers exhibited a greater awareness of positive economic developments in August than any other time during the past five years. “Consumers less frequently reported hearing of job losses, more often reported that the economy had already improved, and half of all consumers expect good times financially during the year ahead,” according to Curtin. The renewed economic strength, however, has meant that the majority of consumers now expect interest rates to increase during the year ahead.

Despite the rise in mortgage rates, home buying remains quite positive as consumers act to buy homes before mortgage rates go any higher. The rise in mortgage rates, however, has ended the boom in home refinancing. Consumers judged buying conditions for vehicles and household durables less favorably in August, however. “Despite the size of the discounts now offered by vehicle manufacturers, consumers judged available discounts much less favorably in August, and they also found the size of the discounts on appliances, furniture, and home electronics less appealing,” according to Curtin. While overall buying attitudes still remain favorable enough to support expanded sales, growing demands for discounts will continue to squeeze profit margins. “Apart from the more volatile prices for energy and food, consumers still expect lower prices on goods and are ready and willing to shift their purchases toward retailers that offer the largest discounts,” said Curtin.

Consumers judged their personal financial prospects for the year ahead much less favorably in August as consumers anticipated both a higher rate of inflation and smaller wage increases. While the recent rise in gasoline prices has had an adverse impact on finances, consumers anticipated that the increase in gas prices will be temporary. “The basic concern of consumers is that smaller income gains they now expect coupled with a higher inflation rate, even if temporary, will mean that their living standards will not increase as much as they had originally anticipated,” noted Curtin.

of Consumers Internet: www.umich.edu/~umsurvey