Research >> Economics
University of Michigan Consumer Confidence Up Again
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Consumer confidence rose in May as consumers became increasingly convinced that the economy is in its final stages of contraction and that President Obama’s stimulus programs would spark renewed economic growth. While consumers anticipate an improved economy, they nonetheless think that their own financial situation will improve only marginally during the year ahead. Consumers still view their finances as out of balance with the economic realities they now face, and want to continue to increase their savings and reduce their debts. These intentions will mute the pace of spending gains during the year ahead.
The Index of Consumer Sentiment was 68.7 in the May 2009 survey, up from 65.1 in April and 57.3 in March, and above the 59.8 recorded last May—the second positive year-to-year change since mid 2007. The Sentiment Index is still 30% below its January 2007 of 96.9. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, rose to 69.4 in May from 63.1 in April and 50.5 in February, a jump of 27% during the past three months. The Expectations Index was well above last May’s 51.1, but still 21% below its January 2007 peak of 87.6.
A psychological sign that the cyclical bottom has been reached is when the base of comparison used by people shifts from the prior peak to the recent trough. Compared with the state of the economy six months ago, consumers have indeed regained a good measure of confidence. Compared with the prior peak, however, consumer confidence remains at relatively low levels. This is especially true of people’s views of their own finances. The majority of consumers in May reported that their financial situation had worsened primarily due to income declines, shorter work hours, and lost jobs. When asked to explain in their own words how their finances had changed, an all time record number of consumers mentioned that their income had declined—cited by 36%. More importantly, consumers expected an overall income increase of just two-tenths of one percent, the smallest expected income gain ever recorded in the long history of these surveys. Even given the currently low inflation rate, only onein-ten consumers expected real income gains during the year ahead.
Posted: May 29, 2009 Friday 10:00 AM