Consumers became a bit less optimistic about prospects for the economy in the latest survey but still maintained an optimistic outlook for their personal finances. Importantly, consumers anticipated that the inflation rate would remain near record lows over the next five years. The economy is anticipated to be strong enough in the year ahead to maintain the unemployment rate at its current low, and consumers expect only minor increases in interest rates. Although purchases of vehicles and homes are anticipated to remain at very favorable levels, the rate of increase is expected to slow during the year ahead. Overall, real personal consumption expenditures are anticipated to increase by 2.5% through mid 2017.

Personal Finances
Consumers assessments of their current finances posted small consecutive monthly declines since their fifteen year peak was set in June. Most of the decline in the past several months was due to fewer income gains, and consumers anticipated somewhat less frequent gains during the year ahead. Nonetheless, consumers remained optimistic about their future finances largely due to the expectation that inflation will remain at very low levels.

Prospects for Economy
Half of all consumers reported that the economy had recently improved, and half anticipated that the overall pace of growth would remain unchanged during the year ahead. Of greater concern, half of all consumers in the October survey anticipated that an economic downturn would occur sometime during the next five years, reversing the improvement in long-term economic prospects recorded during the past two years. This decline may have been aroused by the (hopefully) temporary impact of uncertainty about future economic policies.

Consumer Sentiment Index
The Sentiment Index was 87.2 in the October 2016 survey, down from 91.2 in September, the 2016 low of 89.0 set in April, and last October’s 90.0. Nearly all of the October decline was concentrated in the Expectations Index, which fell by 7.1% from last month and by 6.5% from last October. In contrast, the Current Conditions changed slightly, remaining between last month’s and last year’s levels.

For the first time in two years, the most recent survey found that half of all consumers anticipated that an economic downturn would occur sometime in the next five years. Objectively, the probability of a downturn in the next five years is far from zero—this would be the longest expansion in 150 years if it lasted just over half of the five year horizon used in the question.

While this may simply reflect a temporary bout of uncertainty caused by the election, consumers have also recognized that the lows in inflation, unemployment, and interest rates cannot last forever. As yet, very few see any reason for the next downturn, but few doubt that it will eventually occur.