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July 30, 2004

U-M Surveys of Consumers: Robust job growth expected to continue

ANN ARBOR, Mich.—Consumer confidence rose in the July 2004 survey due to more favorable employment prospects. “The July survey indicated that consumers expected the economy to produce new jobs at a robust pace during the year ahead,” according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. Since the start of 2004, consumer confidence has remained at its most favorable levels in four years. “Consumers anticipate that the pace of economic growth will be strong enough to significantly lower the unemployment rate during the year ahead,” Curtin said.

The Index of Consumer Sentiment was 96.7 in the July 2004 survey, up from 95.6 in June and the 90.9 recorded last July. The Expectations Index, a closely watched component of the Index of Leading Economic Indicators, was 91.2 in the July 2004 survey, up from 88.5 in June and the 83.7 recorded a year ago.

“The small increase in interest rates announced by the Federal Reserve Board was universally anticipated by consumers for some time. More importantly, consumers expect repeated small interest rate hikes throughout the year ahead,” Curtin noted. Rising interest rates were not expected to have much impact on overall prospects for economic growth, but consumers have reacted strongly to the anticipated increases in mortgage rates. “Home sales have benefitted from the widespread view among consumers that it would be better to buy before mortgage rates increased any further,” Curtin said.

Consumers reported hearing news of rising employment four times as frequently in July than a year ago. “Consumers in the July 2004 survey had a more favorable outlook for declines in unemployment than at any other time during the past twenty years,” according to Curtin. The majority of consumers reported that the economy had improved in July, with twice as many consumers hearing news of positive economic developments compared with the survey conducted last July.

“While the upward surge in inflation has ended, consumers are not yet convinced that inflation will soon return to the low levels recorded last year,” according to Curtin. Consumers have reluctantly concluded that gas prices will not decline from current levels anytime soon. Overall, consumers expected an inflation rate of 3.0% during the year ahead in the July survey, which was below the 3.3% inflation rate they expected in the prior two months, but nearly double the 1.7% recorded a year ago.

“Expected declines in inflation and increases in incomes prompted consumers to more favorably evaluate their personal finances,” Curtin noted. Consumers more frequently reported income gains in the July survey than anytime since the start of the year. To be sure, the persistently high prices for gas and food has had a larger impact on lower income households. “Twice as many households with lower incomes complained about high prices than households with incomes above the overall median,” according to Curtin. Nonetheless, consumers at all income levels reported some progress in July.

Contact: Richard Curtin
Phone: (734) 763-5224
E-mail: curtin@umich.edu