Consumer confidence recorded a small decline in January, partially reversing the very strong gain in the December 2004 survey, according to a survey conducted by the University of Michigan.

 

“The insignificant overall decline resulted from less favorable expectations about future economic conditions being offset by more favorable assessments of current economic conditions,” said Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers.

 

The cumulative economic gains from the strong pace of economic growth in 2004 were reflected in the most favorable assessments of current economic conditions recorded in more than four years. “Despite the recent economic strength, consumers are now more likely to expect the rate of economic growth to moderate to a more sustainable pace in 2005,” noted Curtin.

 

The survey data indicate that overall real consumer spending should expand at a 3 1/3 percent annual rate of growth during 2005.

 

The Index of Consumer Sentiment was 95.5 in the January 2005 survey, down from 97.1 in December, but nearly identical to the 2004 average of 95.2. The Current Conditions Index was 110.9 in January, up from 106.7 in December, and the highest level recorded since the November 2000 survey. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell to 85.7 in January from 90.9 in December.

 

Despite the anticipated moderation in pace of growth, the majority of consumers still expect good times financially in the economy as a whole. “The key issue for consumers is whether the economy will be able to produce an above average number of additional jobs during the year ahead,” Curtin said.

 

Consumers were evenly divided on whether there would be enough jobs added to significantly lower the unemployment rate.

 

Consumers judged their current financial situation more favorably than any other time during the past four years, with half reporting that their finances had improved during the past year.

 

When asked about their financial prospects for the year ahead, consumers also were more optimistic as households expected income increases of 2.9 percent during the year ahead.

 

Although the 2004 inflation rate rose to its highest level in four years, consumers anticipated that the inflation rate would fall. The year-to-year change in the CPI recorded in December of 2004 was 3.4 percent, which consumers anticipated would fall to an annual rate of 2.7 percent in the years ahead.

 

Consumers cited low mortgage rates as the main reason for their favorable views of home buying conditions. Conventional mortgage rates are now about two-thirds of a percentage point below the levels that prevailed when the Fed starting raising interest rates last June. “Rather than buying in advance of rising mortgage rates, consumers are still focused on buying in advance of rising home values,” Curtain said.

 

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