Confidence Weakening
Among Upper-Income Households

A small November gain in the University of Michigan's Index of Consumer Sentiment did not reverse what has been a downward trend in the monthly Index since January 2000. We caution that the Index in November was still higher than the average level for any prior year in the Survey's 50-year history. Nonetheless, the Michigan survey's director, Richard Curtin, thinks that "overall, the data point toward a slowdown in the rate of growth of consumer spending during the year ahead."

Confidence has weakened the most among upper-income households. All of the November gain in the Sentiment Index was among households with incomes below $50,000. In contrast, confidence among higher-income households fell for the fourth consecutive month, and is 10% below the January, 2000 peak. Lower income households had a positive outlook for job prospects in the coming year while upper-income households signaled growing concerns about unemployment. Not surprisingly, declines in stock prices are coloring the economic view of upper-income households. Curtin writes, "When asked about what economic news they had recently heard, one-in-seven upper income households spontaneously reported declines in stock prices as the most significant recent change."

Overall, consumers rated their current personal financial situation more favorably in November, but had a somewhat less favorable outlook about the year ahead. They expect inflation to decline during the year ahead, but also report a growing awareness of slowing economic growth. When asked about recent changes in the economy, "only 12 percent could identify any positive recent development in November. This was the lowest level of favorable economic news reported since the last recession." Curtin is careful to note that, despite the decline in assessment of future prospects, "consumers could hardly be described as pessimistic about near-term prospects, as the current reading is still comparable to the average levels recorded from 1997 to 1999. While slower growth is expected, very few consumers think that it will cumulate and lead to recession." Of course, since the November survey was conducted consumers have been bombarded with a steady rain of pessimistic economic stories by the news media. It will be interesting to see if such news further dampens the outlook for personal finances.

A bright spot in the November survey was stronger buying attitudes. The recent drop in mortgage rates has markedly improved home-buying attitudes, reversing all of the decline recorded over the summer. There was good news and bad news for automakers and retailers. Consumers viewed buying conditions for vehicles, furniture, appliances and home electronics favorably as well, but most of the improvement was due to more frequent discounting. The fewest consumers since the 1960s complained about high prices for vehicles and household durables.