Consumer confidence declined slightly in March

ANN ARBOR—Confidence posted a small decline in March due to heightened concerns about rising gas prices and higher interest rates. “Although the overall level of confidence has remained at a relatively high level, the details indicate a significant shift in consumer spending is underway,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers.

Consumers held the least favorable attitudes toward buying conditions for homes and vehicles in five years, while voicing the most favorable views toward a wide range of household durables, including furniture, appliances, and home electronics. “Rising mortgage rates have begun to erode the enthusiasm of home buyers, and smaller and more selective discounts on vehicle prices and interest rates have dampened vehicle buying plans,” noted Curtin. Overall, the survey indicate that real consumer spending should expand at a 3 1/3% annual rate of growth during 2005.

The Index of Consumer Sentiment was 92.6 in the March 2005 survey, down from 94.1 in February, and below the 95.8 recorded last March. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell to 82.8 in the March 2005 survey, down from 84.4 in February and 88.8 in February, but still above the 106.8 recorded last March.

Rising gas prices have weakened the financial situation of consumers, as the proportion of households that reported financial gains dropped to 45% in March from 50% in February. “More than one-in-five households with incomes below the median cited higher gas prices as the main reason for their worseningfinances,” according to Curtin.

Higher gas prices and higher interest rates are expected to slow the pace of economic growth during year ahead. “The anticipated slowdown in economic growth meant that consumers expected smaller net gains during the year ahead,” Curtin said. The majority of consumers in the March survey expectedthe unemployment rate to remain largely unchanged at its current level during the year ahead.

How can consumers expect a higher inflation rate, no letup in the pace of interest rate increases, smaller job gains, a slower rate of growth in the economy and still voice a positive overall level of confidence?net job losses, and that the current economic expansion will continue at a moderate pace,” said Curtin.

Nonetheless, Curtin indicated that consumer confidence is now more vulnerable to rising or persistently high prices, larger interest rate hikes on mortgages and consumer credit, and even smaller job gains than anticipated. Buying attitudes toward homes and vehicles fell to a five-year low, while attitudes toward buying conditions for household durables were at their most favorable level in five years. The largest decline was vehicle buying plans, as the fewest consumers in five years favorably judged the discounts offered on prices interest rates, and more consumers cited their uncertainty about future gas prices as a reason to postpone purchases. Home buying plans suffered from rising mortgage rates, with the fewest consumers since the start of 2001 holding positive views on current mortgage rates.

Further Information: Richard T. Curtin, Director Surveys of Consumers Internet: www.umich.edu/~umsurvey