Consumer confidence bounces back

June 1, 2005

More jobs, higher incomes on the horizon

Inman News

The Conference Board today announced its consumer confidence index, which had declined in April, rebounded in May. The index now stands at 102.2, up from 97.5 in April.

The present situation index increased to 116.7 from 113.8, and the expectations index improved to 92.5 from 86.7.

"Consumer confidence improved in May, gaining back nearly all of the ground it lost in April," said Lynn Franco, director of The Conference Board's Consumer Research Center. "The present situation index, despite fluctuations in recent months, is more than 26 points higher than a year ago. Consumers' concerns about the economy and jobs have eased. The expectations index, while slightly below year-ago levels, continues to signal economic growth in the months ahead."

Consumers' assessment of current conditions was more positive in May than in April. Those claiming business conditions are "bad" edged down to 16.8 percent from 17.6 percent. Those claiming conditions are "good" was virtually unchanged at 26.5 percent. The employment picture was mixed. Consumers saying jobs are "hard to get" increased to 24.2 percent from 22.9 percent, but those claiming jobs are "plentiful" rose to 22.6 percent from 20.4 percent.

Consumers' expectations for the next six months, which had been losing ground since January, reversed course in May. Those anticipating business conditions to improve increased to 18.6 percent from 17.7 percent, while consumers expecting business conditions to worsen slid to 9.5 percent from 9.9 percent.

The outlook for the labor market was also brighter in May. Those expecting more jobs to become available in the coming months edged up to 14.9 percent from 14 percent, while those expecting fewer jobs declined to 15.9 percent from 18.4 percent. The proportion of consumers anticipating their incomes to improve in the months ahead rose to 17.2 percent from 16.8 percent.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.

Meanwhile, the University of Michigan Survey of Consumers showed that consumer confidence posted a small decline in May, marking the fifth consecutive monthly decline, with the sentiment index falling to its lowest level since April 2003.

The index of consumer sentiment was 86.9 in the May 2005 survey, down from 87.7 in April and 90.2 in May 2004. The index of consumer expectations, a closely watched component of the index of leading economic indicators, fell to 75.3 in May 2005, down from 77 in April and 81.6 in May 2004. The current economic conditions index was 104.9 in May 2005, just ahead of the 104.4 recorded in April and the 103.6 in May 2004.

"Although a small loss was recorded for the month as a whole, the data clearly indicate that the decline in confidence ended in the second half of May," according to Richard Curtin, the director of the University of Michigan's Surveys of Consumers.

To be sure, consumers are still very much concerned about rising interest rates and weakening job prospects, but consumers no longer expect additional increases in gas prices, according to a press statement.

"There is a considerable degree of uncertainty among consumers about when and by how much gas prices will actually decline," according to Curtin.

Although gas prices have declined from their peaks, they are still high enough to strain the finances of American households. The data indicate that overall growth in real spending will ease to 3 percent during the balance of 2005, down from 3.6 percent in the first quarter of 2005.

The proportion of households that reported improved finances fell to 40 percent in May, down from 50 percent three months ago. More importantly, just one-third of all consumers expected their finances to improve during the year ahead, unchanged from April, remaining at the lowest level recorded during the past 10 years. These weakened financial prospects were due to a higher inflation rate rather than slower expected income growth.

Consumers were evenly split about whether the pace of economic growth would accelerate or slow during the year ahead. Small increases rather than additional declines in the unemployment rate were expected by a 2-to-1 margin in the May survey.

"It would appear that consumers' uncertainty is more about the timing rather that the direction of future change in the economy, as the highest proportion in a decade now expect an economic downturn sometime during the next five years," Curtin said.

Home sales have again reached new peaks as consumers have seamlessly shifted from the irresistible enticement of record-low mortgage rates to the equally irresistible temptation of purchasing in advance of rising mortgage rates and home prices. More consumers favored buying homes in advance of anticipated increases in mortgage rates and prices in the May survey than at any other time in the last decade.

"Attitudes toward home-buying conditions have recently displayed nearly all of the characteristics of earlier bouts of advance buying, a reaction that has typically generated an economic bust following an extended boom," Curtin said. The last time the survey recorded a comparable number of references to advance buying was in 1988-89, more than two years before home prices began to decline in some areas of the country.

Copyright 2005 Inman News

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