Consumer optimism surges in December
December 23, 2016
ANN ARBOR—As unexpected as Trump’s election, consumers expressed much more positive economic expectations following his victory. While the surge in confidence ended by mid-December, it nonetheless led to the highest level of the Sentiment Index since January 2004, according to the University of Michigan (U-M) Surveys of Consumers.
An all-time record number of consumers spontaneously mentioned the expected favorable impact of Trump’s policies on the economy, according to U-M economist Richard Curtin, who directs the Surveys. Consumers anticipated that a stronger economy would create more jobs, although expected wage gains were quite meager. Smaller income gains were offset by record low inflation expectations. Overall, after a contentious election, to a surprising degree, consumers have given the incoming president the advantage of economic optimism and confidence in his policies.
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.
“Needless to say, the record gain in consumer confidence was based on anticipated policy changes, with the specific details as yet unknown,” said Curtin. “On the positive side, such favorable expectations could help jump-start growth before the actual enactment of new policies. A potential drawback is that these favorable expectations will act as a much higher performance standard that people will use to judge the effectiveness of Trump’s policies. More substantial wage gains are critical to the success of Trump’s expansive fiscal policies as well as the shift toward less expansive monetary policies. Until more is known, the 2017 real consumption forecast is 2.7 percent.”
Favorable outlook for personal finances
Consumers held the most favorable personal financial outlook of the past ten years. An improved financial situation during the year ahead was expected by 40 percent of all consumers in December, the highest level since 2006. The gains were largely due to recent income increases, which were also the most positive since 2006. Expected annual income growth retreated to 1.5 percent from 1.8 percent last month. The smaller expected income gains were offset by declines in inflation expectations, which fell to the lowest levels since the Great Recession.
Buying depends on low rates
In contrast to the expected improvements in jobs and personal finances, consumers did not express more positive attitudes toward vehicle and home buying conditions. Higher interest rates on purchases of vehicles and higher mortgage rates have limited the same type of resurgence in these buying plans. Importantly, the degree of resistance to interest rate increases depends on improvements in wage expectations above their current low levels.
Consumer Sentiment Index
The Sentiment Index was 98.2 in the December 2016 survey, up from 93.8 in November and October’s pre-election reading of 87.2, reaching the highest level since January 2004. Most of the gains were in the Expectations Index, which rose to 89.5, up from last month’s 85.2 and October’s 76.8. The Current Conditions Index rose to 111.9 in December from 107.3 in November and October’s 103.2.
About the Surveys
The Survey 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.