Gains Reported In Consumer Confidence and Spending

Consumer confidence improved in December to its best level in six months and its second highest level since the start of 2008, according to Richard T. Curtin, director of Thomson 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, the December report said. 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.

“Lessening job uncertainty pushed buying plans for household durables up to their highest level in three years," Curtin said. "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. Nonetheless, consumers’ views of their financial situations have remained quite negative due to the widespread expectation of stagnant incomes."

However the current state of consumers’ financial situations remains grim, the report says. Just 23 percent 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,” the report said.

The Consumer 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.

“The best holiday gift to consumers was news that job gains were on the horizon. Compared with the more favorable prospects for the overall economy, consumers have maintained a very cautious outlook for their own finances. They have good cause to be cautious. This was the second time in 2010 that news of job gains prompted a rally in confidence,” the study said.

“ Indeed, consumers voiced nearly the same confidence at the end of 2010 as at the start of the year. Given the prominent role of government policies in the reversal and recovery, the coming battles on how to close the deficit will have a significant impact on confidence in 2011 and beyond.”


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