Consumer confidence posted a strong gain in December, as consumers were more positive about overall economic prospects for the year ahead, according to the latest University of Michigan Survey of Consumers.

“Consumers have shown a remarkable degree of resilience throughout the past year and as a consequence their behavior has added a good deal of stability to the overall economy,” according to Richard Curtin, the director of the University of Michigan’s Surveys of Consumers. Consumers have not become overly optimistic, however. “While consumers expect some improvement during the year ahead, they anticipate only modest increases in employment during 2005,” Curtin said. Rather than indicating the start of a new upward surge in confidence, the December data simply confirms that confidence has remained largely unchanged at positive levels for the entire year.

The index of consumer sentiment was 97.1 in the December 2004 survey, up from 92.8 in November and the 92.6 recorded last December. During 2004, the sentiment index averaged 95.2, and showed only small month-to-month variations. The expectations index, a closely watched component of the index of leading economic indicators, was 90.9 in December, up from 85.2 in November, and just ahead last year’s 89.8.

There is wide agreement among consumers that the end of the housing boom in near. Home- and vehicle-buying plans benefited from the view that it was better to borrow in advance of the additional increases in interest rates that are widely expected in 2005. “While fewer and fewer consumers judged current mortgage rates to be attractively low, more consumers thought it would be better to buy in advance of expected increases in interest rates and home prices,” Curtin said. Overall, one-in-four consumers in the December 2004 emphasized the need to act before additional increases in interest rates and prices. Three-fourths of all consumers expected interest rates to increase during 2005.

Vehicle-buying plans have been increasingly based on the expectation that vehicle manufacturers would offer larger discounts on prices and interest rates. “Two-thirds of all consumers based their positive vehicle-buying views on the availability of deep discounts during the year ahead,” Curtin said. Without those discounts, vehicle sales would decline below this year’s sales levels.

Consumers more frequently reported favorable news of economic developments in the December survey. “While more families expected good times financially in the economy as a whole, they nonetheless expected the pace of growth to be somewhat slower in 2005 than 2004,” explained Curtin. This expected slowdown in the rate of economic growth caused consumers to anticipate that the unemployment rate would not decline by very much during the year ahead.

The only area that did not show any improvement in the December survey was consumers’ evaluations of their current finances. “Consumers did express greater optimism about their finances during the year ahead as they anticipated somewhat larger income gains and lower gas prices next year,” Curtin noted.

***

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