Good News: Consumer Confidence Improves

Consumer confidence continued to improve in December for the fourth consecutive month, according to Richard T. Curtin, Director and Chief Economist, Thomson Reuters/University of Michigan Surveys of Consumers, who said the December gain primarily reflected more positive expectations for the economy in 2012.

"Importantly, consumers more frequently reported hearing news about employment gains in the December survey. Unfortunately, consumers did not assess their personal finances more positively, with recent income declines being reported twice as frequently as income increases," the December survey said.

While the December survey recorded the most optimistic expectations for the national economy since August, income changes were reported to be the worst since last Spring, the survey said.

"Assuming the payroll tax cut will be passed and made retroactive to the start of 2012, the data indicate that inflation-adjusted personal consumption expenditures will rise by 1.8 percent during 2012."

Key conclusions of the survey include:

 Economy Expected to Improve: The improvement in the economic outlook was large, but still left the overall prospects for the economy at low levels. Good times economically were expected in 2012 by 29 percent in December, up from 19 percent in November and the recent low of 14 percent in August. While more consumers heard news of employment gains in December, they didn’t expect that those gains would have much impact on the national unemployment rate in the months ahead.

Personal Finances Still Dismal: The majority of consumers reported that their finances worsened during 2011, and just one-in-four households anticipated that their financial situation would improve in 2012. Only one-in-ten families anticipated an increase in the living standards during 2012. These assessments have been largely unchanged over the past two years.

Consumer Sentiment Index: The Sentiment Index rose to 69.9 in the December 2011 survey, between the 64.1 in November and last December’s 74.5. Importantly, this was the fourth consecutive month that the Sentiment Index increased from its Au-gust low of 55.7. Most of the December gain was in the Expectations Index, which rose to 63.6 in December from 55.4 in November, but still below last December’s 67.5. The Current Conditions Index was 79.6 in December, slightly above the 77.6 in November and below last year’s 85.3.

“Given the continued weakness in consumers’ assessments of their personal finances, the Congressional stalemate on extending the payroll tax holiday could easily reverse the recent gains. To be sure, consumers have come to expect last minute action by the Congress, not inaction on such a vital issue," Curtin said.

"If the payroll tax holiday is not extended, it would be a significant drag on economic growth, and would increase the likelihood that weakness in consumer spending would again put the economy at risk of a renewed downturn. Even a month long delay would heighten uncertainty and cause con-sumers to begin to take precautionary actions.” Curtin said in his analysis.

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