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April 30, 2004

Confidence unchanged as job gains offset rising prices and interest rates

ANN ARBOR, Mich—Consumer confidence remained largely unchanged in April as more robust job growth was offset by concerns about rising inflation and higher interest rates. “Consumers were more responsive to job gains than higher prices largely because they anticipated that the price increases would be temporary,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. Record high gas prices caused a significant drain on consumers’ discretionary incomes, especially among lower income households.

Consumer spending depends on job growth as never before. Rather than representing the last remaining economic problem that needs to be corrected, more robust job growth is now needed to offset higher interest rates due to rising inflation. “As long as job growth proceeds at reasonably robust levels in the months ahead, spending plans can easily weather small increases in interest rates,” according to Curtin.

The Index of Consumer Sentiment was 94.2 in the April 2004 survey, just below the 95.8 in March and the 94.4 in February, but well above the 86.0 recorded last April. The Expectations Index, a closely watched component of the Index of Leading Economic Indicators, was 87.3 in the April 2004 survey, just below the 88.8 in March, but well above the 79.3 recorded a year ago. The favorable level of the Sentiment Index indicates that total growth in personal consumption expenditures will average about 3½ % during the year ahead.

“Consumers expected an inflation rate of 3.2% during the year ahead in the April 2004 survey,” according to Curtin. Consumers nearly doubled the rate of inflation that they now anticipate from the low of 1.7% they expected last year. Just as important, consumers expected the rapid rise to be reversed in the years ahead. “Long term inflation expectations actually fell in April and were ½ a percentage point below the inflation rate expected for the year ahead—the largest gap in nearly a quarter century,” Curtin noted.

There is, however, a new sense of vulnerability among consumers due to rising inflation. “In an earlier era consumers expected firms to pass cost increases forward to product prices, but now consumers anticipate that firms will try to pass cost increases backward, to be absorbed by higher labor productivity and outsourcing,” Curtin said. Consumers are thus more likely to anticipate slower employment growth and smaller wage increases as a result of higher inflation. “This new form of inflationary psychology will shift the attention of consumers from product markets to labor markets, and their behavior from more aggressive purchasing of products to more defensive protection of jobs,” according to Curtin.

Consumers held more favorable home buying attitudes in the April 2004 survey as current mortgage rates were viewed as a bargain compared to the higher interest rates consumers widely anticipate. Overall, small year-to-year declines in home sales can be expect through the balance of 2004. Vehicle buying attitudes were unchanged as greater concerns about prices were offset by more favorable employment prospects among consumers. Likewise, vehicle sales can be expected to remain at about the same level as recorded last year.

Contact: Richard T. Curtin, Director Surveys of Consumers
Phone:
(734) 763-5224
E-mail: curtin@umich.edu
Internet:
www.umich.edu/~umsurvey