Research >> Economics
University of Michigan Consumer Confidence rose in January to 92.0
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Consumer confidence remained largely unchanged, as the January reading was just 0.6% below last month’s level. The small downward revisions were due to stock market declines that were reflected in the erosion of household wealth as well as weakened prospects for the national economy. The interviews conducted from last Friday until early this week provide no evidence that the East Coast blizzard influenced the data. To be sure, the overall level of confidence is below last January’s peak, but thus far the decline amounts to just 6.2%, a drop that does not indicate an impending recession but rather a somewhat slower pace of economic growth in 2016. Overall, the data point toward gains of 2.7% in real consumption expenditures during 2016.
Personal Finances
The fewest consumers in a year reported that their finances had recently improved, and consumers expected the smallest gains in their nominal incomes since the summer of 2014. Despite the falloff in nominal income expectations, inflation-adjusted income expectations remained unchanged at very favorable levels. More than ever, favorable financial prospects have become dependent on a very low inflation rate. This is a dramatic change from a half century ago when inflation was the scourge, not the benefactor, of improved financial prospects.
Weaker Growth Dims Job Prospects
Stock price declines and a weakened global economy were spontaneously mentioned by one-third of all households with incomes in the top third, the highest level since the Asian Tiger crisis in 1997-98. While consumers still viewed prospects for the economy favorably, they expected a slowing in the pace of growth. The primary concern of consumers is that the growth slowdown will lead to a slightly higher jobless rate by the end of 2016.
Consumer Sentiment Index
The Sentiment Index was 92.0 in the January 2016 survey, just below December’s 92.6 and substantially below last January’s 98.1. The Current Conditions Index was 106.4 in January 2016, down from last month’s 108.1 and last year’s 109.3. The Expectations Index was 82.7 in January and December, but well below last year’s 91.0. The small falloff from last year indicates slower growth, not a recession.
Consumers anticipate the slowdown in the pace of growth will be accompanied by smaller wage gains and slight increases rather than declines in unemployment by the end of 2016. Importantly, it has been very low inflation rates that have maintained inflation-adjusted income expectations at the highest levels since 2007. The Fed’s success at pushing the inflation rate higher may well outdistance the pace of wage gains, offsetting a critical strength in consumers’ financial expectations. Consumers will actively demonstrate their resistance by moderating their purchases in the face of price hikes, acting to erase the Fed’s rationale for higher rates.
Posted: January 29, 2016 Friday 10:00 AM