Research >> Economics
University of Michigan Consumer Confidence increased in August to 82.5
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Consumers reported that their finances had improved due to more jobs, higher wages, and gains in wealth. Indeed, consumers judged their current financial situation more favorably than anytime since the start of the Great Recession. While past gains have usually been associated with optimism about future gains, consumers remained skeptical about their future financial prospects. Most of the August gains were driven by rising stock prices and wages among households in the top third of the income distribution, while those in the bottom two-thirds reported slightly less positive gains than in July. To be sure, all households have benefited from the resurgent economy. The data indicate that consumption spending will grow at a 2.5% pace in the year ahead.
Gap in Finances Widens
A growing divide in personal finances across income groups was found in the latest survey. Among households with incomes in the top third, 59% reported being better off, compared with just 36% with incomes in the bottom two-thirds. Net income gains were reported by 34% among the top third in incomes, compared with no net gains in the bottom two-thirds. Moreover, net wealth gains were cited by 22% with incomes the top third, while just 2% cited net wealth gains in the bottom two-thirds. Importantly, these gaps have widened in the past year.
Less Optimism about Future Prospects
People do not expect as much financial progress during the year ahead as in the past year. Among households with incomes in the top third, just 39% expect to improve financially, significantly less than the 59% who reported recent financial progress, and only 27% expect improvement among those with incomes in the bottom two thirds, well below the 36% who reported recent financial gains.
Consumer Sentiment Index
The Sentiment Index was 82.5 in the August 2014 survey, just above the 81.8 in July and slightly above last August’s 82.1. Over the past nine months, the Sentiment Index has remained largely unchanged, in the narrow range between 80.0 and 82.5. The renewed strength in the past year was focused on Current Conditions (+4.8%), while the Expectations Index fell by a slightly larger amount (-3.3%).
The stability in consumer expectations during the past nine months has helped to insulate the economy from much larger swings in business investments. At the same time, the problem is that confidence has been unable to rise above those modestly positive levels. This reflects the ability of the Fed to raise asset prices, which has primarily benefitted upper income households, and their inability to prompt wage increases, which has prevented the reestablishment of a more broadly based optimism. A weakened trend in equity and home prices in the absence of resurgent wages would threaten the modest pace of consumer spending now expected.
Posted: August 29, 2014 Friday 10:00 AM