Consumer optimism withstands midterm elections

November 21, 2018
Written By:
Bernie DeGroat
Contact:
  • umichnews@umich.edu

ANN ARBOR—Consumer sentiment has remained largely unchanged at very favorable levels during 2018, with the November reading nearly at the center of the 11-month range from 95.7 to 101.4, according to the latest University of Michigan Surveys of Consumers.

Although the data recorded a within-month decline of 2.8 index points following the election, the drop was related more to income than political party, said U-M economist Richard Curtin, director of the surveys.

Among those with incomes in the bottom third of the distribution, the Sentiment Index rose by 10.4 points and fell by 6.6 points among those in the top third of the income distribution. In contrast, the Sentiment Index remained unchanged among Democrats and Republicans prior to and following the election. Overall, the latest data indicate that real consumer spending will advance at a 2.6-percent pace during 2019.

“Consumers’ interest rate expectations have always traced the outlines of economic cycles. As expansions lengthen, the number of consumers who expect interest rate increases gradually increases,” Curtin said. “After some threshold is reached, however, consumers in large numbers abruptly anticipate future declines in interest rates. Sales declines are then accelerated not only by falling job and income prospects but also from the expectation of falling interest rates.

“While there is no reason to anticipate a sudden change in interest rate expectations in the next few months, it is still an important task for the Fed to avoid hitting the threshold that causes widespread postponement of purchases.”

Personal Finances Remain Positive
Just over half of all consumers reported that their finances had recently improved, with 23 percent mentioning net income gains in November, up from 18 percent last November. Net income increases were sharply reduced among consumers with incomes in the top third, falling to 29 percent in November from last December’s 52 percent.

When asked about expected gains in nominal incomes during the year ahead, an increase of 2.5 percent was expected across all consumers, equal to the highest level in the past decade, which was first recorded in June 2018. Among those in the prime working age range from 25 to 54, an income gain of 3.4 percent was expected for the year ahead.

Buying Plans Weaken
Favorable vehicle-buying attitudes remained at the same five-year low recorded last month. Consumers made as many favorable as unfavorable references to prices, and low net interest rates on vehicle purchases were mentioned by one-third of last year’s total. Favorable home-buying conditions remained at depressed levels, as favorable references to mortgage rates fell by more than half compared with last November.

Overall, the growing negative reactions to interest rates will act to reduce the number of homes and vehicle sales in the year ahead.

Consumer Sentiment Index
The Consumer Sentiment Index was 97.5 in the November 2018 survey, just below October’s 98.6 and last November’s 98.5. The Expectations Index was 88.1 in November, just below 89.3 in October and last November’s 88.9. The Current Conditions Index declined slightly to 112.3 in November from 113.1 in October and last November’s 113.5.

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 Index the minimum is 6 points.

 

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