Partisanship dominates consumer optimism in February

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ANN ARBOR—Although consumer confidence edged downward in February, the overall average in the past three months was the highest in more than a decade, according to the University of Michigan (U-M) Surveys of Consumers.

Normally, the implication would be that consumers expected Trump’s election to have a positive economic impact, according to U-M economist Richard Curtin, who directs the Surveys.

That is not the case, however, as Democrats expressed expectations that are consistent with an impending recession, and Republicans expected renewed robust economic growth. While these extreme views largely offset one another, the self-identified Independents held expectations much closer to the optimism of the Republicans than to the pessimism of the Democrats. The data indicate a 2.7 percent growth rate in consumption during 2017, but also indicate greater volatility and potential differences in discretionary spending across population subgroups.

Conducted by the U-M Institute for Social Research (ISR) since 1946, the Surveys monitor consumer attitudes and expectations. The data are available non-exclusively via Bloomberg.

“The sharp partisan divide that now dominates consumer sentiment is unprecedented, and consumers cannot be expected to ignore economics for the sake of politics,” said Curtin. “No recession, as expected by Democrats, is likely to be on the horizon; neither is more robust economic growth, as anticipated by Republicans. These extreme views are likely to converge in the future due to continued modest GDP growth as well as favorable trends in employment and wages. Unfortunately, the convergence from mainly political to mainly economic influences on consumer sentiment is likely to persist for an extended period of time. Importantly, buying plans have been least affected by partisanship, showing traditional sensitivity to prices, interest rates, and discretionary incomes. Until more is known, the 2017 real consumption forecast is 2.7 percent.”

Favorable Outlook for Personal Finances

Rising incomes as well as home and stock values meant that consumers held quite favorable views of their current finances. Financial prospects for the year ahead eased back from last month’s decade peak, largely due to slower wage gains and a higher expected inflation rate. Interestingly, current personal finances were viewed more favorably by Democrats, but future financial prospects were viewed more favorably by Republicans.

Outlook for Economy and Jobs Improves

Favorable long-term prospects for the national economy were voiced by the largest proportion of consumers since 2004. More importantly, the largest proportion of consumers expected unemployment to fall below its already low level, the most optimistic view since 1984—due to much more favorable expectations among Republicans. Rising interest rates were expected by more consumers in the last two months than in the last decade.

Consumer Sentiment Index

The Sentiment Index was 96.3 in February 2017, just below January’s 98.5 and December’s 98.2, the highest three-month average since March 2004. The Current Conditions Index was 111.5 in February, insignificantly different from 111.3 in January or the 111.9 in December, the highest average since 2001. The Expectations Index was 86.5 in February, between last month’s 90.3 and last year’s 81.9.

About the Surveys

The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95 percent level in the Sentiment Index is 4.8 points; for Current and Expectations Indices the minimum is 6.0 points.

Contact

Kory Zhao, koryzhao@umich.edu, 734-647-9069
Diane Swanbrow, swanbrow@umich.edu
Surveys of Consumers, 734-763-5224

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