Consumer Confidence: Down but Not Out

Nobody was surprised to learn that the leading measures of consumer confidence recorded sharp declines in July. July was a bad month for economic news, dominated by corporate accounting scandals and, through most of the month, steady erosion in stock prices. Consumers noticed. The University of Michigan's Index of Consumer Sentiment fell to 88.1 in July, from 92.4 in June. All of the gains in the index over the past 6 months were erased (see chart below).

Fewer consumers now expect the economy to improve over the year ahead. One-third of all households reported that their financial situation worsened in July. Income declines were cited as frequently by high-income households as low-income households.

Still, the director of the Michigan survey, Richard Curtin, noted several hopeful signs in the responses. Although the data indicate a slowdown in consumer spending, they do not signal an outright decline in total expenditures. Falling interest rates seem to be offsetting consumers' worry about broader economic trends and the declining value of their stock portfolios. Vehicle buying attitudes improved in July. Zero-percent interest incentives on auto purchases were cited by 80% of consumers. Home buying attitudes improved a bit as well, spurred by declining mortgage rates. In contrast, buying attitudes toward furniture, electronics and other household durables did not improve.

A negative "wealth effect" attributable to the dramatic decline in stock prices is affecting consumers' outlook. With an argument that should be familiar to readers of this space over the past year, Curtin predicted that "over the next few years the savings rate is likely to show a persistent increase, and a correspondingly lower growth rate in consumption. Indeed, a higher savings rate will redress what consumers now judge is the greatest worsening during the past five years in their chances for a comfortable retirement."

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