Consumer confidence improved slightly in the August survey due to consumers more favorable evaluations of their present financial situation. Rather than citing income changes, consumers were more likely to cite reductions in the amount of their outstanding debt. These improvements, however, did not extend into the future, as their financial prospects for the year ahead remained unchanged at negative levels. The majority of consumers anticipated no wage gains in the year ahead, and the majority expected falling inflation-adjusted incomes. Perhaps more distressing, half reported that their financial situation was now worse than it was five years ago, and half expected no improvement in the next five years.

Buying Plans: Discounts Versus Tax Uncertainty
Buying plans were bolstered by the availability of deeper price discounts as well as record low interest rates. More consumers with household incomes below $75,000 held favorable buying attitudes toward large durable goods than any other time since August of 2007. Among higher income households, however, these buying attitudes were slightly less favorable in August and remained well below the peaks recorded in 2010 and 2011.

Slower Economic Growth Expected
Consumers thought that the pace of economic growth would slow slightly, although there was no change in their overall assessment of the economy. The majority of consumers in August thought that economic conditions would remain unfavorable until the start of 2013, and just one-third expected a continuous expansion over the next five years. Importantly, there was no change in consumers’ negative views about current economic policies.

The Consumer Sentiment Index was 74.3 in August 2012, up from 72.3 in July, and well above last August’s 55.8. The outsized year-to-year gain of 18.5 Index-points from last August reflects a rebound from the disastrous lows during the debt ceiling debate. The Expectations Index fell to 65.1 in August, only slightly below July’s 65.6, but it was the lowest since the start of 2012. In contrast, the Current Conditions Index improved to 88.7 in August, a large gain from 82.7 in July, and the highest since the start of the year.

Despite the August gain, confidence has been in a holding pattern during the past few months. Aside from the past few years, the average level of consumer confidence in 2012 was lower than in any other year since 1982. Currently, a major source of uncertainty is about when the fiscal cliff will be bridged, and who will bear the burden of the tax increases and the spending cutbacks. This uncertainty will increasingly cause consumers to become more cautious spenders. While some worry about the negative impact on spending from upper income consumers, the spending of every worker is threatened by the end of the payroll tax cuts in January.