ANN ARBOR—Consumers were a bit less optimistic in August than one month or one year ago, although consumer confidence remains at a reasonably high level, according to the University of Michigan (U-M) Surveys of Consumers.
Less favorable personal financial prospects were largely offset by a slight improvement in the outlook for the overall economy, according to U-M economist Richard Curtin, who directs the Surveys. Most of the weakness in personal finances was among younger households who cited higher expenses than anticipated as well as slightly smaller expected income gains. Importantly, long term inflation expectations fell to the lowest level ever recorded, with near term inflation expectations anchored to that same low level. Low interest rates have increasingly become the sole driver of large discretionary expenditures. Strength in personal finances and low interest rates will maintain the growth in real consumption at 2.6 percent through mid-2017.
Conducted by the U-M Institute for Social Research (ISR) since 1946, the Surveys monitor consumer attitudes and expectations. The data are available non-exclusively via Bloomberg.
“Consumers have become increasingly dependent on ultralow inflation and interest rates,” said Curtin. “While wage gains have recently improved, it is still low inflation that has been a key ingredient in preventing declines in living standards. Consumers do not anticipate an increase in inflation anytime over the next five years, and have increasingly discounted any significant increase in interest rates during the year ahead. Small increases in inflation or interest rates would not be surprising to consumers, but the expectation of policies aimed toward cumulative increases in inflation or interest rates could cause a more substantial and negative reaction.”
Mixed Changes in Personal Finances
Among all households, 44 percent reported that their financial situation had recently improved, unchanged from one month or one year ago. One-third of all households reported recent income gains in August, the same as in July. Financial prospects for the year ahead declined in August, as just 29 percent expected their finances to improve, down from 36 percent in July and the lowest level since late 2014. Almost all of the decline was among those under age 35.
Favorable Buying Attitudes
The source of favorable buying plans has shifted from attractive pricing to low interest rates. Home buying has become particularly dependent on low mortgage rates, with net references to low rates mentioned by 53 percent—this figure has been exceeded in only one month in the past ten years. In contrast, low housing prices were cited by just 26 percent, for the fourth time in the last 5 months, and the lowest figure in ten years.
Consumer Sentiment Index
The Sentiment Index was 89.8 in the August 2016 survey, barely below July’s 90.0 and slightly below last August’s 91.9. The Sentiment Index remained largely unchanged in August from one month ago due to offsetting shifts: the Expectations Index rose to 78.7 from 77.8 last month, while the Current Conditions Index declined to 107.0 in August from 109.0 in July.
About the Surveys
The U-M Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95 percent level in the Sentiment Index is 4.8 points; for Current and Expectations Indices the minimum is 6.0 points.
More information: Surveys of Consumers