Consumer Confidence Improves to Highest Level in Six Months

Reuters/University of Michigan survey cites improved employment expectations as cause for rise

Consumer confidence improved in December to its best level in six months and its second highest level since the start of 2008, according to the latest Reuters/University of Michigan Surveys of Consumers.

The gain was due to improved employment expectations that made consumers more willing to spend and adopt more favorable prospects for the overall economy. Consumers reported much more favorable news about recent changes in the job situation, and more frequently expected the unemployment rate to decline during the year ahead, according to the survey.

Lessening job uncertainty pushed buying plans for household durables to their highest level in three years. While holiday sales benefited from the improvements recorded in the past two months, combined with the recent passage of the tax legislation, consumer spending can be expected to increase in 2011.

“The worst of the unemployment numbers are behind us, and housing prices appear to have stabilized,” says Bryan Sadoff of Milwaukee-based Sadoff Investment Management.  “That being said, even though the Great Recession is behind us, it doesn’t necessarily make for a great recovery.”

Personal Finances Remain Dismal

Sadoff’s comments reflect the survey’s findings, as consumers’ views of their financial situations have remained negative due to the widespread expectation of stagnant incomes. The current state of consumers’ financial situations remains grim. Just 23% reported recent gains in their finances, unchanged from last December, as twice as many consumers reported income declines as income advances. Just one-in-four consumers expected their finances to improve in the year ahead, which has remained unchanged for the past six months.

The majority of consumers anticipated no income increases during the year ahead, as they have for a record 24 consecutive months. Income constrained consumers favored price discounts, as half of all consumers cited the availability of price discounts on household durables, and two-thirds of all consumers cited discounts on either prices or interest rates on vehicle purchases.

“We believe interest rates and inflation will remain low in 2011,” Sadoff says. “It will be a slow and steady stock market environment, with a bit of volatility thrown in for good measure.”

Consumer Sentiment Index

A closer look at the numbers finds the Sentiment Index was 74.5 in the December 2010 survey, up from 71.6 in November and 67.7 in October. While gains over November were recorded by both the Current Conditions Index (+3.9%) and Expectations Index (+4.2%), the entire year-over-year gain was in the Current Conditions Index (up by 9.4%). This gain was mainly due to more favorable buying plans for durables.

The Expectations Index, a component of the Index of Leading Economic Indicators, worsened during the past year (-2.0%), primarily due to weaker personal financial prospects.

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