January consumer confidence: Low inflation critical for maintaining confidence

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ANN ARBOR—Consumer confidence remained largely unchanged, as the January reading was just 0.6 percent below last month’s level, according to the University of Michigan (U-M) Surveys of Consumers.

The small downward revisions were due to stock market declines that were reflected in the erosion of household wealth as well as weakened prospects for the national economy, according to U-M economist Richard Curtin, who directs the Surveys.

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 interviews conducted from last Friday until early this week provide no evidence that the East Coast blizzard influenced the data. To be sure, the overall level of confidence is below last January’s peak, but thus far the decline amounts to just 6.2 percent, a drop that does not indicate an impending recession but rather a somewhat slower pace of economic growth in 2016. Overall, the data point toward gains of 2.7 percent in real consumption expenditures during 2016.

“Consumers anticipate the slowdown in the pace of growth will be accompanied by smaller wage gains and slight increases rather than declines in unemployment by the end of 2016,” said Curtin. “Importantly, it has been very low inflation rates that have maintained inflation-adjusted income expectations at the highest levels since 2007. The Fed’s success at pushing the inflation rate higher may well outdistance the pace of wage gains, offsetting a critical strength in consumers’ financial expectations. Consumers will actively demonstrate their resistance by moderating their purchases in the face of price hikes, acting to erase the Fed’s rationale for higher rates.”

Personal Finances
The fewest consumers in a year reported that their finances had recently improved, and consumers expected the smallest gains in their nominal incomes since the summer of 2014. Despite the falloff in nominal income expectations, inflation-adjusted income expectations remained unchanged at very favorable levels. More than ever, favorable financial prospects have become dependent on a very low inflation rate. This is a dramatic change from a half-century ago when inflation was the scourge, not the benefactor, of improved financial prospects.

Weaker Growth Dims Job Prospects
Stock price declines and a weakened global economy were spontaneously mentioned by one-third of all households with incomes in the top third, the highest level since the Asian Tiger crisis in 1997-98. While consumers still viewed prospects for the economy favorably, they expected a slowing in the pace of growth. The primary concern of consumers is that the growth slowdown will lead to a slightly higher jobless rate by the end of 2016.

Consumer Sentiment Index
The Sentiment Index was 92.0 in the January 2016 survey, just below December’s 92.6 and substantially below last January’s 98.1. The Current Conditions Index was 106.4 in January 2016, down from last month’s 108.1 and last year’s 109.3. The Expectations Index was 82.7 in January and December, but well below last year’s 91.0. The small falloff from last year indicates slower growth, not a recession.

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.

Contacts
Diane Swanbrow: swanbrow@umich.edu, 734-647-9069
Surveys of Consumers: www.umich.edu/~umsurvey, 734-763-5224

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