Consumer optimism was affected by lower gas prices and an unusually harsh winter. The small overall decline from January still left consumer confidence at the highest levels in eight years. It is hard not to attribute the small February decline to the temporary impact of the harsh weather, as declines that occurred in the Northeast and Midwest were triple the average loss, while Southern residents grew more optimistic. Low gas prices had a larger impact on lower income households, narrowing the difference between low and high income households. The data indicate that total real personal consumption expenditures will grow at 3.3% during 2015.

Growth Prospects Soften Temporarily
The small February decline was largely due to softening growth prospects for the national economy during the year ahead. When asked to describe recent economic developments in their own words, consumers mentioned the harsh winter weather and its impact on business and employment. Nonetheless, the last time more consumers anticipated year-over-year declines in the jobless rate was thirty years ago. Importantly, there was little change in favorable expectations for continued growth in the economy over the longer term. Despite recent concerns, the last time other than last month consumers were more optimistic about the economy was in 2004.

Wage Gains Narrow
The latest survey found that consumers had reduced the more favorable wage gains they anticipated during the prior two months. In the February 2015 survey, households anticipated an annual income increase of 1.0%, down from 1.9% last month and barely above last February’s 0.9%. While consumers under age 45 expected the largest wage gains, households with incomes in the bottom third reported the largest month-to-month increase.

The Consumer Sentiment Index was 95.4 in the February 2015 survey, just below the January’s expansion peak of 98.1, but well above last February’s 81.6. The Current Conditions Index fell to 106.9 in February from 109.3 one month ago and was well above last February’s 95.4. The Expectations Index fell to 88.0 from 91.0 in January but was substantially above last February reading of 72.7.

The underlying strength that has kept confidence at high levels has been job gains. While buffeted by harsh weather and lower gas prices, consumers have remained focused on gains in jobs and wages. Consumers intend to increase their spending during the year ahead, but they also want to keep a tight reign on their debt as well as to increase their precautionary savings. Few consumers believe that gas prices will not increase in the future, and even fewer think the economy will no longer suffer downturns. Without more robust wage increases, consumers will increasingly condition their spending on the availability of reduced prices.