Consumer confidence should remain high in 1996

November 17, 1995

ANN ARBOR—Despite Americans’ fears about future employment and income prospects, consumer confidence will remain high in the year ahead, according to Richard T. Curtin, director of the University of Michigan Surveys of Consumers.

” It must be recognized, however, that most of the remaining strength is not based on prospects for further improvement, but rather on the expectation that there is little likelihood of any significant deterioration,” said Curtin, who presented the coming year’s consumption prospects at the U-M’s 43rd annual Conference on the Economic Outlook Nov. 16.

” Thus, while consumers view economic prospects for the year ahead as strong enough to allay any concerns about a looming recession, they do not expect the pace of economic growth to be vigorous enough to spark any further gains in income and employment.”

The Index of Consumer Sentiment gauges Americans’ attitudes toward personal finances, business conditions and buying conditions, was 90.2 during October. While the index is expected to remain relatively high (its monthly average is 92.5 since January 1994), consumer anxiety regarding unemployment may continue unabated.

Curtin said that 43 percent of consumers expect the national unemployment rate to increase next year, up from 28 percent at the beginning of 1995, while only 10 percent anticipate further declines.

”Indeed, one of the most distinctive aspects of the current expansion has been consumers’ persistent apprehensions about employment prospects,” he said. ”Even as the expansion has lengthened and the unemployment rate has dropped to relatively low levels, these concerns have not significantly eased.”

Coupled with employment concerns, many Americans fear that their own financial prospects will worsen, Curtin added.

”Indeed, the recent weakness in consumers’ financial prospects is the primary area of concern,” he said. ”To be sure, the extent of the decline in financial prospects has thus far been relatively modest, and barring any further deterioration, are still favorable enough to support the continuation of spending at its current pace.”

According to Curtin, however, consumer buying attitudes provide little evidence that the pace of vehicle sales will improve in 1996.

Less than 20 percent of consumers, he said, believe that current vehicle-loan interest rates are favorable, and while reports of price discounts and rebates have become more frequent, the number of buyers complaining about high vehicle prices in the last six months has risen to its highest level in 10 years.

Curtin added that favorable home-buying attitudes have shown no increase in the last three months, which follows substantial gains made earlier in the year.

”Although the recent reversal in favorable opinions toward interest rates was more pronounced for vehicles, the recent halt in the improvement in home buying was also due to less favorable assessments of mortgage rates,” he said.

”Convincing consumers that interest rates are more likely to edge downward than upward would clearly help revitalize this otherwise lackluster outlook. In addition, diminished financial prospects have increasingly focused the timing of consumers’ purchase decisions on the availability of price discounts, as well as heightened their resolve to postpone purchases in their absence.”

On the other hand, consumers anticipate relatively low inflation in 1996, with prices expected to rise by just 2.9 percent, Curtin said. Further, consumers expect inflation to remain at that same low level during the next five years.

”The inflationary risks from modest additional declines in interest rates appear particularly small, and the renewed strength that such declines would spark would help bolster consumers’ employment and income prospects,” he said. ”Interest rate adjustments are now needed just as much as they were last year to stabilize consumer confidence.

”Even without modest additional reductions in interest rates, there is no evidence that consumers would sharply curtail spending. But without those reductions, the pace of spending is more likely to slow.”