The latest University of Michigan survey on consumer sentiment places the blame of falling consumer confidence on a combination of “surging food and fuel prices, falling home prices, shrinking employment and smaller income gains.”

Level of Consumer Sentiment continues April’s downward trend

In an effort to keep our dealers informed of the latest consumer trends Auto Credit Express presents the most current Reuters/University of Michigan survey on consumer sentiment.

ANN ARBOR. Consumer confidence fell to its lowest level since the June 1980 survey. The decline was due to surging food and fuel prices, falling home prices, shrinking employment and smaller income gains. “Consumers are painfully aware that their living standards are shrinking under the weight of higher food and fuel prices and see little hope for improvement any time soon,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. Consumers’ ability to buy has been diminished by smaller income gains, fewer jobs, higher prices of necessities, falling home prices, rising credit standards, and record levels of outstanding debt. Consumers have become more cautious spenders and are determined to rebuild their reserve funds. “For consumers to increase their savings as well as cope with the higher costs of food and fuel will require a prolonged shift in budgets away from discretionary spending,” Curtin said.

The Index of Consumer Sentiment was 59.8 in the May 2008 survey, down from 62.6 in April, and significantly below the 88.3 recorded last May and the peak of 96.9 recorded in January of 2007. The last time it was lower was in June 1980 when it was 58.7. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 51.1 in the May 2008 survey, down from 53.3 in April, and well below the 77.6 recorded in May 2007 and the peak of 87.6 in January 2007.

The all-time low in the Expectations Index (44.1) was recorded in July 1979 and real personal consumption expenditures fell in 1980 by three-tenths of one percent (0.3%). The recent decline is not quite as deep and the slowdown in spending is expected to be smaller than in 1980. Total real personal consumption expenditure growth is expected to be just under 1% in 2008, with the pace weakening until early 2009. “While it is still unlikely, a somewhat deeper downturn in spending can no longer be easily dismissed,” Curtin added.

Nine-in-ten consumers thought that the economy was in recession in May, with record numbers citing unfavorable news about rising prices, lost jobs, slowing economic growth, and the continuing fallout from the credit and housing crises. “Three-in-four consumers expected bad times financially in the economy during the year ahead, the highest proportion to anticipate such negative economic prospects in more than a quarter century,” said Curtin.

Buying plans for vehicles and household durables, such as furniture, appliances, and home electronics, were the least favorable since the early 1980's. “When asked to explain their views, consumers said that they favored the postponement of purchases given their uncertainty about their future income and job prospects as well as concerns about the future course of gas and food prices,” Curtin said.

Half of all families reported that their finances has recently worsened in the May 2008 survey, the bleakest assessment since the early 1980s. “While higher prices have had a devastating impact, smaller income gains, mostly due to fewer work hours, also had a negative impact,” Curtin noted. Even households in the top third of the income distribution reported an accelerated decline in their financial situation in May. Moreover, the majority of all households expected a declining inflation-adjusted income during the year ahead.

Inflation expectations rose in May to their highest levels in more than two decades. Although much lower, long term inflation expectations also reached a decade peak in the May survey. While most consumers expected a decline in the inflation rate in the next several years, the survey data make it clear that consumers now anticipate a higher longer term inflation rate.

Richard T. Curtin • Director, Reuters/University of Michigan Surveys of Consumers • Phone 734.763.5224
Reuters Media Relations Hotline: 877.955.4773 ext. 1 • http://www.reuters.com/universitymichigan