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University of Michigan Consumer Confidence rose in April to 88.3
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The April survey recorded continued gains in consumer confidence due to a growing sense that the upward momentum in jobs and incomes is likely to persist, according to the University of Michigan Surveys of Consumers.
The renewed confidence is due to record federal stimulus spending, both recent and proposed, as well as the positive impact from a growing share of the population who are vaccinated, said U-M economist Richard Curtin, director of the surveys.
The largest and most important change in the economic outlook was that an all-time record number of consumers expected declines in the unemployment rate in the year ahead. Overall, the data indicate an exceptionally robust outlook for consumer spending through mid-2022, he said.
“The pace of spending gains depends on strong job growth and wages that effectively draw people back into the labor force,” Curtin said. “While temporary price hikes are anticipated, those increases will affect lower-income households the most. Moreover, robust spending increases will act to heighten inflation above the modest gains now anticipated.
“It will be a challenge to fine-tune policy to allow inflation to modestly exceed the 2% target for some time without contributing to the upward momentum in inflation. While it is critical to first secure robust and equitable growth, plans are needed to avoid falling inflation-adjusted incomes and higher interest costs.”
Robust job gains expected
Consumers were well aware of ongoing improvement in the national economy, judging the economy to have significantly improved from the start of 2021, Curtin said. Favorable developments in the economy were cited by twice as many in April than in January, with the largest increases in reports of net job gains.
When specifically asked about the outlook for unemployment, 52% expected declines in the year ahead, the largest percentage ever recorded in the long history of the surveys. Importantly, half of all consumers expected growth prospects to remain favorable until mid-2022, although there was still some concern about the longer term outlook for the economy.
Home sales: Income gains offset price increases
Homebuying conditions slipped only modestly in April in spite of an all-time record number of complaints about high home prices. Although higher prices will usually lessen demand, this reaction may be overwhelmed by strong growth in jobs and incomes, Curtin said.
“Rising home prices and rising incomes create the most fertile soil for the potential growth of inflationary psychology,” he said. “At present, most consumers have no personal recollection of the inflationary psychology that dominated the economy a half-century ago, and even fewer can imagine the reintroduction of Volcker’s extreme interest rate policies that were needed to finally conquer inflationary psychology.”
Consumer Sentiment Index
The Consumer Sentiment Index rose to 88.3 in the April 2021 survey, up from 84.9 in March and well above last April’s 71.8—the best reading since the start of the pandemic. The Expectations component rose to 82.7 in April, up from last month’s 79.7 and last year’s 70.1. The Current Conditions Index rose to 97.2, up from last month’s 93.0 and last year’s 74.3.
The April survey recorded continued gains in consumer confidence due to a growing sense that the upward momentum in jobs and incomes will persist. The renewed confidence is due to record federal stimulus spending, both recently passed and proposed, as well as the positive impact from a growing share of the population who are vaccinated. The largest and most important change in April was that an all-time record number of consumers expected declines in the unemployment rate during the year ahead. Even if a booming economy resulted in higher inflation, consumer optimism would not diminish since consumers have already anticipated a temporary increase. Overall, the data indicate an exceptional outlook for consumer spending through mid-2022. The size and persistence of the spending gains depend on continued job growth as well as wages that effectively draw people back into the labor force.
While temporary price hikes are anticipated, the robust increases in consumer demand will act to lengthen and heighten inflation above the modest increases now anticipated. It will be a challenge to fine-tune fiscal and monetary policies that allow inflation to modestly exceed the 2% target for a limited time without contributing to an underlying upward momentum in inflation. Home buying conditions slipped only modestly in April in spite of an all-time record number of complaints about high home prices (38%-see the chart). The natural tendency of higher prices is to lessen demand, but this reaction will be overwhelmed by strong growth in jobs and incomes. Rising home prices and rising incomes create the most fertile soil for the growth of inflationary psychology. While it is critical to first secure robust and equitable economic growth, contingency plans are urgently needed to avoid declining inflation-adjusted incomes and surging interest costs.
Posted: April 30, 2021 Friday 10:00 AM