Research >> Economics
University of Michigan Consumer Confidence slipped in February to 91.7
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Consumer confidence has remained largely unchanged in the past few months, with the February reading barely different than last month (-0.3%) or three months ago (+0.4%). The overall stability, however, reflects gains in personal finances being offset by weaker conditions in the overall economy. The strength in personal finances has been largely due to a very low inflation rate as well as modest gains in wages, while the weakness has been due to a slowdown in exports, manufacturing, and oil production as well as volatile financial markets. Confidence slipped 6.5% from its January 2015 peak, but that drop only indicates a somewhat slower pace of economic growth in 2016. Overall, the data point toward gains of 2.7% in real consumer spending during 2016.
Personal Finances Brighten
The proportion of households that reported an improved financial situation rebounded to 47% in February from 40% in January, to regain last February’s level. When asked about expected income gains in the year ahead, an increase of 1.9% was anticipated across all households. This rate of increase was tied with the January 2015 reading as the highest since September 2008. Overall, consumers judged their financial prospects for the year ahead more favorably in the February 2016 survey than any other time since October 2006.
Weaker Economic Growth Dims Job Prospects
Unfavorable economic developments dominated the news heard by consumers in the recent survey, with more frequent mentions of job losses rather than gains. While the economy was still expected to improve, consumers increasingly thought that economic conditions would be less satisfactory, especially during the year ahead. The main complaint voiced by consumers was that the slowdown will trim the pace of job growth in the year ahead.
The Sentiment Index was 91.7 in the February 2016 survey, barely below January’s 92.0, but down from last February’s 95.4. The Current Conditions Index was 106.8 in February 2016, largely unchanged from either January’s 106.4 or last February’s 106.9. The Expectations Index was 81.9 in February, just below the 82.7 in the prior two months, but significantly below last February’s 88.0.
The Fed seeks a helping hand to lower real interest rates from an old foe: inflationary psychology. Higher inflation expectations can accelerate perceived declines in real interest rates and stimulate spending. The risk associated with this strategy is the Fed’s ability to “fine-tune” the resulting inflationary psychology, limiting expectations to their 2% target. The more likely result is that consumers will reduce rather than increase spending due to lower inflation-adjusted incomes. This reaction is hardly new to consumers, as the erosion of incomes due to price increases had repeatedly ended spending booms during the inflationary era of the 1970's.
Posted: February 26, 2016 Friday 10:00 AM