In the latest report from the University of Michigan Surveys of Consumers, a small gain in consumer confidence is not seen as a portent of recovery from the current economic downturn.

ANN ARBOR. Consumer confidence rose by a surprising amount in July, with gains posted across all income and age groups as well as among all regions of the country. “Even after the small July gain, the overall level of consumer confidence is dismal and still points toward declines in the pace of spending in late 2008 and early 2009,”according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. The gains could signal that consumers simply overestimated the extent of the economic damage or even that they now sense that the end of the economy’s decline is on the distant horizon. “It is more likely that the gains in confidence reflect a “dead cat bounce,” a phenomena has been repeatedly observed over the past fifty years: following a steep decline in confidence a small gain is recorded before confidence resumes its downward slide,” Curtin explained.

The Index of Consumer Sentiment was 61.2 in the July 2008 survey, up from 56.4 in June, but 32% below the 90.4 recorded in last year’s July survey. There have been less than a dozen surveys since 1952 that recorded a lower level on confidence. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators that is noted for its ability to foreshadow recessions, was 53.5 in the July survey, up from 49.2 in June, but down 34% from last July’s 81.5. A recession has always occurred whenever the Expectations Index has declined by this amount.

The extent of the economic damage reported by consumers remained sizable. More than half of all consumers reported that their financial situation worsened due to higher food and fuel prices and half anticipated that their overall living standards would decline in the year ahead. While the anticipated declines in inflation-adjusted incomes were mainly due to higher expected inflation, consumers also anticipate shorter work hours, fewer bonuses, and smaller wage gains.

Nine-in-ten consumers thought the economy was in recession, with record numbers citing unfavorable news about rising prices, lost jobs, slowing economic growth, falling stock prices, and the continuing fallout from the credit and housing crises. Six-in-ten consumers expected the unemployment rate to rise and three-in-four anticipated the continuation of bad times financially in the economy during the year ahead. “The appraisals of consumers of their own finances as well as conditions in the national economy remained very negative, near the worst levels recorded in the fifty-year history of the surveys,” Curtin said.

Consumers expected an inflation rate of 5.1% during the year ahead in July, unchanged from June and much higher than the 3.4% they anticipated last year. While concerns about volatile food and fuel prices have heightened, consumers are not as apprehensive about other prices. Over the next five years, consumers expected an annual inflation rate of 3.2% in July, down from 3.4% in the prior two months and barely above last year’s 3.1%. “Rather than anticipating an accelerating inflation rate, consumers think the rate of inflation is well anchored and will gradually fall in the future,” Curtin noted.

Expected changes in interest rates and credit conditions have had a mixed impact on consumers. The maintenance of long-term inflation prospects may reflect a shift among consumers toward the expectation that interest rates will increase during the year ahead, an expectation that began to take hold when the year-ahead inflation rate first rose above 4%. At the same time, higher interest rates and tighter credit conditions have caused half of all consumers to plan to reduce their outstanding debt, especially on credit cards, and thus cut back on their spending.

Richard T. Curtin • Director, Reuters/University of Michigan Surveys of Consumers • Phone 734.763.5224
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