Consumer confidence fell sharply in August due to the surge in gasoline prices, according to the latest Survey of Consumers by the University of Michigan.

“Consumers have found it increasingly difficult to cope with the recent surge in gasoline prices as their required budget cutbacks escalated each time they filled their gas tank,” according to Richard Curtin, the director of the University of Michigan’s survey. The unusually large August decline was widespread among all demographic groups and across all regions of the country. “Consumers anticipated higher inflation, higher interest rates, higher unemployment and a slower pace of economic growth during the year ahead,” Curtin said.

Although consumers did not anticipate a recession during the year ahead, they were more likely to expect an economic downturn sometime during the next five years.

The index of consumer sentiment was 89.1 in the August 2005 survey, down from 96.5 in July and 95.9 in August of 2004. Only 10 monthly surveys since 1978 recorded a larger one-month decline. The index of consumer expectations, a closely watched component of the index of leading economic indicators, fell to 76.9 in August, down from 85.5 in July and 88.2 in August 2004.

Consumers judged their financial prospects for the year ahead much less favorably in the August survey.

“Rising prices were expected to completely offset income gains by 4-in-10 households in August, the highest level in more than 10 years,” Curtin said. The burden of high gas prices was even greater on those with incomes below $50,000, as more than half of these households expected prices to rise faster than their incomes.

Consumers were as likely to expect continued increases in interest rates following the 10th hike as they were prior to the first increase more than a year ago. A higher unemployment rate was also expected. “More than one-third of all consumers in August of 2005 anticipated a rising unemployment rate during the year ahead, the least positive expectation in more than two years,” according to Curtin. Both higher interest rates and a rising unemployment rate reflect the slowdown in the rate of economic growth expected by consumers.

Home-buying attitudes indicated a growing divergence in how consumers evaluate the housing market.

“Although assessments of current home prices were more negative than at any other time since the early 1980s, home sales were driven by the one-third of consumers that favored buying in advance of anticipated increases in prices and mortgage rates,” Curtin said. These advance buying rationales are more likely to change abruptly and thus increase the risk of a sudden deflation of the housing bubble.

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