Consumers optimistic about economic prospects

December 20, 2019

ANN ARBOR—Consumer sentiment rose in the December 2019 survey to near the top of the favorable range it has traveled during the past three years, according to the University of Michigan Surveys of Consumers.

Since the start of 2017, the Sentiment Index has averaged 97.0. This was the second best extended period of optimism recorded in the long history of the surveys, said U-M economist Richard Curtin, director of the surveys. The most favorable average level was during the four years from 1997 to 2000, when the index averaged 105.3.

Impeachments occurred in both periods without having a significant impact on economic expectations, he said. In the December 2019 survey, the impeachment hearing had a barely noticeable impact on economic expectations, as it was mentioned by just 2% of all consumers.

The data point toward a continued expansion in consumer expenditures, strong enough to counter lackluster business investment spending. There are still significant developments that could affect sentiment related to the Senate trial, the election and tariffs, Curtin said.

“The most important news from the December survey involved lower long-term inflation expectations and a shift toward the view that the unemployment rate was finally near its low point,” he said. “Lower long-term inflation affects not only consumer spending and saving decisions as well as judgements about wages, but will also influence policies aimed at avoiding or limiting the impact of the next recession.

“To be sure, no recession is expected by consumers in 2020. Nonetheless, while consumers recognized and applauded the recent decline in unemployment, they now anticipate that the national unemployment rate is more likely to start edging upward rather than downward in the year ahead.”

Record Low in Long-Term Inflation Expectations
Whereas near-term inflation expectations respond to changes in volatile prices (primarily oil prices in recent years), longer-term inflation expectations have more significant impact on the behavior of consumers, Curtin said.

In the December 2019 survey, consumers anticipated an annual inflation rate over the next five years or so to be just 2.2%, the lowest long-term inflation rate expected since this question was introduced in the late 1970s.

Continued Strength in Personal Finances
Assessments by consumers of their own financial situation remained quite favorable, with 56% of all households reporting improved finances, just below the half century peak of 57%. When asked to explain how their finances had improved, rising incomes and higher net household wealth were cited.

As might be anticipated, higher incomes were cited by middle-age workers and improved net wealth was more frequently cited by households with incomes in the top third of the distribution, Curtin said. Just 9% of all households expected their financial situation to worsen in 2020.

Consumer Sentiment Index
The Consumer Sentiment Index rose to 99.3 in December, posting its fourth monthly gain from the low of 89.8 in August. The Expectations Index rose slightly to 88.9 in December from last month’s 87.3 and last year’s 87.0. The Current Conditions Index rose to 115.5 in the December survey from last month’s 111.6, but remained just below last year’s 116.1.

About the Surveys
The 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% level in the Sentiment Index is 4.8 points; for the Current and Expectations Index, the minimum is 6 points.

Bernie DeGroat, 734-647-1847, [email protected]
Surveys of Consumers, 734-763-5224

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