Confidence improved in December as consumers are feeling slightly better about expectations for economic growth and employment. However, the gains are tenuous as personal finances are still being described as “dismal”. The Reuters/University of Michigan Index of Consumer Sentiment rose to 72.5 in December from 67.4 a month ago. While the index sits near the top of its two-year range, it still remains well below the 10-year average and below the 73.5 print we saw in September.
Consumers’ views of their current finances have improved somewhat – 49% reported a worsening financial situation this month compared to 57% a year ago – but just one-in-seven expect any inflation-adjusted income gains during the year ahead. The largest factor in the index improvement was deep discounting on a wide range of household goods by merchants trying to spur holiday sales, which more consumers cited than ever before in the 60-year history of the survey. The Current Conditions Index rose to 78.0 from 68.8 for the month, the highest level since March 2008.
Most believe the worst is behind us, as just one-in-five expect the economy to worsen in the year ahead. While consumers are much less pessimistic about the direction of the economy than a year ago, 54% still expect unfavorable economic conditions going forward. The Index of Consumer Expectations rose from 66.5 to 68.9 in December, right in the middle of its roughly 10-point range since May of this year.
Commenting on the results, University of Michigan Survey of Consumers Chief Economist Richard Curtin said “Consumers reported that the economy was slowly improving and thought that the unemployment rate would only marginally increase. While most think the worst is over; the problem is that consumers are still quite uncertain about when prospects for their own finances will improve. Even when consumers become convinced that sustained gains will be forthcoming, there will still be strong spending headwinds, including intentions to add to their savings and reserve funds and to decrease their indebtedness as well as continued restraints on the availability of credit. Overall, the data suggest consumer spending will rise by just 1.6% in 2010.”
The bottom line is that consumers will not truly believe in the recovery until the job and housing markets materially improve. Spending will remain subdued until people feel more comfortable about their personal finances and worries about unemployment subside. We will get another peek into the mind of the consumer when the Conference Board Consumer Confidence Index, which represents a larger survey sample, is released next Tuesday.
Disclosure: No Positions
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