Consumer confidence improved in early January but then fell back as gas prices rose late in the month, resulting in no overall change to confidence from December to January, according to the University of Michigan’s Survey of Consumers released today.

“Consumers view high gas prices as a threat to their living standards and a threat to the ability of the economy to create new jobs,” said Richard Curtin, director of the survey. Rising interest rates were also a frequently cited concern, affecting both the cost of credit as well as consumers ability to cash-out some home equity to support their spending plans.

Overall, the data points toward growth in personal consumption expenditures of 2 3/4 percent during 2006. The main exception is home sales, where the data point toward declining sales in 2006.

“While the majority of consumers expect the expansion to continue for the foreseeable future, they anticipate that the pace of economic growth will slow due to the combination of high oil prices and higher interest rates,” Curtin said, adding that, “These rising concerns about the vitality of the economy were most evident when consumers were asked about the outlook for the economy in 2007 and beyond.”

The Index of Consumer Sentiment was 91.2 in the January 2006 survey, nearly identical to the 91.5 recorded in December. This was substantially above the October 2005 low of 74.2, but still below the January 2005 reading of 95.5.

The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, fell slightly to 78.9 in January from 80.2 in December. It was much higher than the low of 63.2 recorded in October, but was well below the 85.7 recorded last January.

The Current Economic Conditions Index was 110.3 in January, up from 109.1 in December, and nearly equal last January’s 110.9.

The repeated cycle of rising and falling gas prices during the past year have been mirrored by repeated shifts in how consumers view their financial prospects. “The recent increases in gas prices have thrown a cold blanket on consumers’ hopes for additional declines in gas prices,” said Curtin. While consumers do not expect a repeat of the last spike in gas prices, they now anticipate to remain above the $2 mark over the next few years.

“Consumers have found it especially difficult to cope during the winter months with both higher home heating bills as well as higher gasoline costs,” noted Curtin.

Higher energy prices and higher interest rates are anticipated to slow the pace of economic growth.

“The growth slowdown anticipated by consumers is just enough to result in somewhat smaller wage gains, fewer new jobs, and a somewhat higher unemployment rate during 2006,” said Curtin.

“Consumers have increasingly adopted the view that the rapid run-up in home prices in now over,” according to Curtin. During the past year the number of consumers that viewed home prices as unsustainably high doubled, and the number of consumers that favorably viewed the current level of mortgage rates was cut in half.


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