Consumer confidence improved overall by a substantial amount in December, posting the fourth largest monthly gain in a quarter century, but consumers’ views of home-buying conditions fell to the lowest level in 15 years, according to the University of Michigan’s Survey of Consumers, released Friday.
“Declines in gas prices were responsible for the substantial gain, which nearly restored confidence to the levels recorded prior to the spike in gas prices last August,” said Richard Curtin, director of the university’s consumer survey.
The December gains were concentrated in consumers’ evaluations of their financial situation. “Consumers judged their current finances much more favorably due to declines in gas prices, and were more likely to anticipate additional financial gains during the year ahead,” Curtin said.
The decline in home-buying attitudes was due to widespread perceptions of high home prices and rising mortgage rates, according to the survey. On balance, mortgage rates were judged less attractive than anytime in the last five years.
The index of consumer sentiment was 91.5 in the December survey, up from 81.6 in November and the recent low of 74.2 in October. Despite the recent gains, the sentiment index remained well below last December’s 97.1.
The index of consumer expectations, a closely watched component of the index of leading economic indicators, rose to 80.2 in December 2005, up from 69.6 in November and 63.2 in October, but it remained below the 90.9 recorded in the December 2004 survey.
The current economic conditions index was 109.1 in December, up from 100.2 in November, and rose above last December’s reading of 106.7.
The rise and fall of gas prices during the past year have had an enormous impact on consumers’ assessments of their financial situation, and variations in energy prices will continue to shape consumer confidence during 2006. “Compared with $3 gas, consumers were relieved that gas prices are now closer to $2. Nonetheless, consumers anticipate that gas prices will remain at relatively high levels for the foreseeable future,” Curtin added. A permanent increase in gas prices would shift vehicle-buying preferences toward more fuel-efficient models.
The outlook for the national economy was judged more favorably, although most consumers expected the pace of growth to slow during the year ahead. “The growth slowdown anticipated by consumers is very mild, but just enough to result in smaller job gains and a somewhat higher unemployment rate during 2006,” said Curtin. Interest rates also were expected to continue their upward climb by the vast majority of consumers.
Although consumers reported hearing more favorable news of recent changes in the economy, the clear exception was a significant increase in news of job losses. Consumers reported hearing more news of job losses in the December survey, rising to the highest level in nearly two years. While most consumers expect little change in the national unemployment rate during the year ahead, on the margin nearly three times as many consumers expected increases rather than declines in the December survey.
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