Consumer Confidence Rises In December

Consumer confidence rose to its highest level since July, according to the University of Michigan’s (U-M) Surveys of Consumers. The December reading was nearly equal to the 2015 average of 92.9—which was the highest since 2004.

The December gain was largely due to lower inflation, which bolstered real incomes and brightened buying plans for household durables, according to U-M economist Richard Curtin, who directs the Surveys. There have been only three surveys in more than the past half-century in which a higher proportion mentioned the availability of price discounts for durables. Overall, the data point toward gains of 2.8 percent in real personal consumption expenditures during 2016.

“Just as consumer optimism became dependent on very low inflation, the Fed has begun to take steps to accommodate a higher inflation rate. Since wages are never first to incorporate inflationary adjustments, consumers will make their purchases even more contingent on low prices,” says Curtin. “Moreover, given the weakness in the global economy and the strong dollar, discounting will continue unabated. Indeed, consumers’ first reaction to the zero rate liftoff has been to emphasize the importance of compensating price discounts. As a result, the Fed policies will need to be much stronger to overcome the disinflationary psychology of consumers.”

Consumers’ assessments of their finances rebounded in December, although they remained slightly less favorable than at the start of 2015. While the smallest proportion of consumers in more than ten years complained that inflation had eroded their living standards, this was partially offset by less favorable references to net household wealth than prior to the stock swoon in late August. Importantly, inflation-adjusted income expectations reached their most favorable level since 2002. This was due in part to near record lows in inflation expectations as well as slightly improved income expectations.

Buying plans for household durables reached their highest level in a decade due to the availability of price discounts. Home buying plans recorded a significant jump in the number that made purchases contingent on the availability of reduced home prices in the latest survey, and nearly half of all consumers continued to cite the availability of low mortgage interest rates.

Conducted by the U-M Institute for Social Research (ISR) since 1946, the surveys monitor consumer attitudes and expectations.

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