ANN ARBOR—The Index of Consumer Sentiment rose to 94.9 in the third quarter 1996 survey, nearly regaining the cyclical peak level recorded at the start of 1995, according to the University of Michigan Survey of Consumers. Consumers were more optimistic about prospects for the national economy, and less concerned about rising unemployment in the most recent survey.

Most consumers expected the unemployment rate to remain largely unchanged at its current low level during the year ahead. Inflation was expected to average 3.1 percent during the year ahead, and consumers expected the inflation rate to remain largely unchanged at that same level over the next five years. Also, “confidence in government economic policies increased in the third quarter of 1996, and was at its most favorable level since President Clinton entered office,” according to Richard Curtin, director of the U-M survey.

The only aspect of the national economy that consumers viewed with concern was prospects for interest rates. “Two- thirds of all consumers expected interest rates to increase during the year ahead in the third quarter 1996 survey. As a result, consumers were somewhat more cautious in their views toward purchases of homes and vehicles.” Importantly, Curtin added, the expected increase in the cost of borrowing has thus far been partially offset by improved income and job prospects. “The modest increases in mortgage and consumer loan rates now anticipated by consumers are more likely to diminish spending to a more sustainable pace than result in an overall downturn.”

What are the implications for the upcoming presidential election? “Historically, high consumer confidence right before an election has favored incumbents,” Curtin said. For instance, the Index of Consumer Sentiment was at or near its cyclical peak level in the third quarter surveys preceding each of the last three Presidential elections in which the incumbent won a second term. “Just prior to the 1956 re-election of Eisenhower, the Sentiment Index was 99.9; prior to the 1972 re-election of President Nixon, the Index was 95.2; and in the quarter before the 1984 re-election of President Reagan, the Index reached 98.9. In each case, the Sentiment Index was not only near its cyclical peak but also close to its all-time peak of 103.4 recorded in 1965,” Curtin said.

In contrast, the unsuccessful re-election bids by Presidents Carter and Bush were accompanied by relatively low levels of consumer confidence. Just prior to President Carter’s loss, the Sentiment Index was 67.8 in the third quarter of 1980, only marginally above the recession low of 54.4 recorded in the second quarter. In the quarter prior to President Bush’s re-election loss, the Index of Consumer Sentiment was 76.1, not much above the recession low of 65.1 recorded in the fourth quarter of 1990.

The third quarter 1996 level of the Sentiment Index (94.9) is again near its cyclical peak just prior to a Presidential election. “The historic pattern suggests that the current level of consumer confidence is consistent with a successful re-election bid by President Clinton. To be sure, the outcomes of Presidential elections are not solely determined by the performance of the economy. The data indicate, however, the renewed sense of consumer confidence that now prevails represents an important advantage for President Clinton,” Curtin said.

The survey also noted that consumers judged both their personal finances as well as prospects for the economy as a whole more favorably in the third quarter of 1996 than four years earlier. “Twice as many consumers reported that the overall economy had improved during the prior twelve months in 1996 than in 1992 (51 versus 23 percent), and nearly twice as many consumers expected favorable economic conditions in the year following the election in 1996 than in 1992 (54 versus 30 percent),” he said. Consumers expected lower levels of both unemployment and inflation in the year following the election in 1996 than in 1992, and less than half as many consumers voiced discontent with prevailing economic policies in 1996 than in 1992 (21 versus 53 percent).

The Survey of Consumers, conducted by the Survey Research Center at the U-M, included 1,500 interviews with a representative sample of U.S. households. Begun in 1946, the Survey of Consumers monitors changes in consumer expectations, and is widely used as a leading indicator of changes in future economic prospects. The survey has been directed by Richard Curtin since 1976. The findings reported here were drawn from the 338th Survey of Consumers conducted by the Survey Research Center at the U-M. All surveys are subject to sampling error because not all members of the population are interviewed. Most results for the total sample will differ by no more than 3 percentage points in either direction from what would have been obtained by using the same methods on the entire population.