Research >> Economics
University of Michigan Consumer Confidence Suffered a Setback
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Consumer confidence suffered a small setback in November as consumers reported continued reversals in their personal financial situation. The grim financial realities faced by consumers rose to the worst levels ever recorded in more than sixty year history of the survey. Consumers’ assessments of their finances have been the grimmest since 1946, and have remained at those record low levels for most of the past two years. As each month passes, the capacity of families to withstand the cumulative losses has pushed more and more households into financial hardship. Consumers cite their deteriorating finances as well as their uncertainty about future job and income prospects more than ever before, and this has made them very cautious spenders. Nonetheless, the 22% gain in the Sentiment Index from last year’s low points toward growth rather than declines in consumer spending in the year ahead. Inflation-adjusted total consumer spending, however, is expected to advance by a scant 1.5% in 2010.
The Index of Consumer Sentiment was 67.4 in the November 2009 survey, down from 70.6 in October and 73.5 in September, but substantially above the 55.3 recorded last November (the cyclical lowpoint). The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 66.5 in November, down from 68.6 in October and 73.5 in September, but significantly above last November’s 53.9. The Current Economic Conditions Index was 68.8 in November, down from 73.7 in October and 73.4 in September, but above the 57.5 recorded last November.
When asked to explain in their own words how their finances had changed, the smallest proportion in the sixty-year history of the survey reported income gains—just 9%—and the largest proportion voluntarily cited income declines—38%. Income losses were described in connection with everything from job losses and shorter work hours to the loss of bonuses and even wage give-backs. Even more distressing, the fewest consumers anticipated income gains and the gains expected were the smallest ever recorded.
While there is widespread agreement among consumers that the worst of the downturn is over, there is no agreement on when the economy will be strong enough to significantly lower the unemployment rate. To be sure, consumers no longer expect steep increases during the year ahead, as the data indicate that consumers believe the unemployment rate will peak at 10.7% by mid 2010. The problem is that consumers do not expect the unemployment rate to fall below 10% throughout the year ahead.
Uncertainty about job and income prospects caused a partial reversal in buying plans. When asked about purchases of large durables, like furniture, appliances, and home electronics, 39% mentioned that income uncertainty had caused them to postpone any purchases, only below the all-time peak of 47% set in last November’s survey. Robust gains in employment are required for more robust gains in consumer spending, which will wait until at least 2011. It is hard to imagine how the Obama administration will resist, during an election year, a new federal stimulus plan focused on relieving the economic stress caused by rising unemployment and lackluster income gains to avoid a potential relapse in consumer spending in mid to late 2010.
Posted: November 25, 2009 Wednesday 10:00 AM