July Consumer Confidence Tempered By Economic Outlook

Consumer confidence slipped in July in the University of Michigan’s Surveys of Consumers, down from last month and from July 2015, but it remains at a reasonably high level. Conducted by the U-M Institute for Social Research (ISR) since 1946, the surveys monitor consumer attitudes and expectations.

ISR points to rising concerns about prospects for the economy, mainly expressed by upper income households, for the decline. Uncertainties surrounding global economic prospects and the presidential election have made consumers more cautious in their expectations for future economic growth as well as employment growth. It forecasts that strength in personal finances and low interest rates will maintain the growth in real consumption at 2.6 percent through mid-2017.

“The enduring strength in consumer sentiment during the past 18 months has been in personal finances and buying conditions, while the outlook for the economy and job creation has gradually weakened,” says U-M economist Richard Curtin, who directs the surveys. “Although this mirrors the pattern of aging expansions, it does not necessarily imply we are coming closer to a downturn. Indeed, it may reflect nothing more than lackluster growth during the past seven years and an unusual degree of economic uncertainty. Nonetheless, avoiding a downturn is now more dependent on gains in consumer spending than has been typical in the past, and maintaining that strength deserves special attention.”

The surveys did find that consumers remain upbeat about their current finances. A smaller proportion reported that their finances had worsened during the past year—24 percent—than at any time since the last peak in 2007. The fewest consumers in eight years complained about income losses in each survey during the past three months. Furthermore, income expectations for the year ahead remained positive, especially among younger and middle-income households.

Ultra-low mortgage rates have extended favorable buying plans for homes despite a falloff in perceptions of low and attractive home prices. Low mortgage rates were mentioned three times as frequently as low prices when consumers were asked to explain their views toward current home-buying conditions. For vehicle purchases, low interest rates were mentioned twice as frequently as attractive pricing. Only for purchases of large household durables did attractive pricing dominate low interest rates.

Consumer Sentiment Index was 90 in the July 2016 survey, down from 93.5 in June and last July’s 93.1. Most of the decline was due to the Expectations Index, which fell to 77.8 in July, down from 82.4 in June and last July’s 84.1. The Current Conditions Index fell slightly to 109.0 in July, just below last month’s cyclical peak of 110.8. The gap between the Expectations Index and the Current Conditions Index has grown, averaging its largest difference over the past three months since its last peak in 2006.

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