Consumer confidence recorded its eighth-largest monthly gain in the October 2006 survey from the University of Michigan as consumers looked more positively on the pace of economic growth.

“Declines in gas prices sparked the initial gains in late August, but the more substantial October gains were driven by the expectation of an improved pace of economic growth, larger wage gains and a low unemployment rate during the year ahead,” according to Richard Curtin, the director of the University of Michigan’s Survey of Consumers.

Not all aspects of future economic prospects were positive. Although inflation has improved due to declines in gas prices, consumers remain concerned that an elevated inflation rate will persist during the year ahead, and consumers widely anticipate additional hikes in interest rates next year. “Despite a continued downturn in housing during 2007, the data indicate a 3 1/4 percent growth rate in personal consumption spending during the year ahead,” noted Curtin.

Home-price declines were mentioned by more consumers than any time during the past 15 years.

“Consumers remain uncertain about how much more home prices might fall and therefore reported their continued reluctance to purchase a home any time soon,” Curtin said. While the data indicate continued declines in home sales well into 2007, the extent of the housing downturn may not be as severe as previously anticipated.

The Index of Consumer Sentiment was 93.6 in the October 2006 survey, up from 85.4 in September, and nearly 20 points above last October’s Katrina-depressed reading of 74.2. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, rose to 84.8 in October, up from 78.2 in September and 63.2 in October of 2005. The Current Economic Conditions Index rose to 107.3 in October, up from 96.6 in September and 91.2 in October of 2005.

When asked to describe what news they had heard of recent economic changes, the highest proportion in two years cited favorable developments, with more frequent references to increased employment, lower prices, and a surging stock market. Consumers expected the economy to improve, with the majority expecting good times in the economy during the year ahead, twice the level recorded last October. The renewed economic strength prompted consumers to increasingly abandon their prior expectations that unemployment would rise.

Higher interest rates were also expected to result from the renewed economic strength as well as a persistently high inflation rate. “Two-thirds of all consumers now expect interest rates to increase during the year ahead,” noted Curtin.

Vehicle-buying plans improved in October based on the expectation that vehicle manufacturers would again offer deep price discounts. More consumers made their favorable vehicle-buying plans contingent on price discount than any time since the “employee discount” deals were offered in 2005. “Given current inventory levels, manufacturers will find it hard to avoid a return to deep discounting,” Curtin added. This is especially true given the apprehensions among consumers about purchasing vehicles with low fuel efficiency, concerns that are more frequent among households most likely to purchase new vehicles.

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