Consumer confidence improved in June despite rising interest rates and high gas prices, according to a survey released today.
The Index of Consumer Sentiment was 84.9 in the June 2006 survey, up from 79.1 in May, but well below the 96 recorded in June of 2005, according to the University of Michigan’s Survey of Consumers. Most of the June gain was in consumers’ evaluations of current economic conditions, and most of the loss compared with a year ago was in consumers’ future economic prospects.
The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, rose slightly to 72 in June from 68.2 in May, but remained significantly below the 85 recorded in June of 2005. In comparison, the Current Economic Conditions Index rose to 105 in June 2006, up significantly from 96.1 in May, but remained somewhat below the 113.2 in June of 2005.
“Rather than a free-fall in confidence that has sparked recessions in the past, consumers have demonstrated a resilience based on a newfound sense of long-term economic stability,” said Richard Curtin, director of the survey.
While consumers will curtail their spending in the year ahead to accommodate higher gas prices and smaller cash-outs from home refinancing, the spending cutback will be moderate. “The growth rate in overall spending will slow to about 2 3/4 percent during the year ahead,” Curtin said.
Although high energy prices are no longer viewed as temporary, consumers have not abandoned their view that inflation will revert to lower levels over the longer term. “A central element of consumers’ newfound resilience is that they do not anticipate an escalating inflation rate in the future,” Curtin noted. Unlike any other time in the past quarter century, this new belief that inflation will fall over the longer term has been consistently observed in the past few years.
Consumers expressed concerns in the June survey about the corrosive impact of higher inflation as well as the risks of an economy-wide downturn. “Consumers judged the inflation risk as the more immediate threat, and the risks of recession as a more distant threat on the horizon,” Curtin noted. Consumers remained quite pessimistic about prospects for their inflation-adjusted incomes.
“Just one-third of all consumers expect their financial situation to improve, with a rising number that expect inflation to offset any wage gains they receive during the year ahead,” said Curtin. Overall, nearly half of all consumers anticipated that their inflation-adjusted incomes would decline during the year ahead, the worst outlook since the early 1990s.
Consumers’ buying plans improved in June due to a growing recognition among consumers that price discounts were becoming large enough to overcome their resistance to higher interest rates on credit purchases.
Buying attitudes toward vehicles and large household durables improved the most, although they remained below the more favorable levels recorded last year.