Consumer Sentiment Revised Up, But Confidence Falls on Expectations of Lower Income

Indicators of consumer confidence were mixed in the first month of the new year. Thomson Reuters and the University of Michigan reported that its final estimate of consumer confidence, Consumer Sentiment, rose by 1.2% on a seasonally adjusted monthly basis in January to 73.8. The final reading was revised up 2.5 points from its January estimate that was released earlier in the month. Meanwhile, the Conference Board reported that its measure of consumer confidence declined by 12.1% to 58.6. Since reaching a post-recession peak of 73.1 in October 2012, the Conference Board’s measure of consumer confidence has declined three consecutive months, a total of 19.8% in that time period. Since the recession was declared over in June 2009, consumer confidence has grown by 18.9%; however it remains 35.3% below its pre-recession level.

The recovery in consumer confidence following the end of the recession largely reflects an improvement in consumers’ assessment of their current situation. Since June 2009, the Consumer Confidence Index: Present Situation has more than doubled, growing by 129.2%. However, the index had fallen to a very low level. Over this same period the Consumer Confidence Index: Expectations has declined by 9.1%, albeit, the index experienced wide swings in the intervening period. For example, between February 2011 and October 2011, the Expectations Index fell by 48.7% while the Present Situation Index declined by 19.8%. The decrease in consumer confidence during this period may have resulted from the negotiations over the debt ceiling taking place during this time. The data indicate that both of the underlying components of consumer confidence rose sharply soon after reaching this low. By December 2011, consumers’ expectations regained 78.9% of the ground it lost, while consumers’ view of their present situation exceeded its February 2011 level by 37.4%.

The most recent month-over-month decline in consumer confidence reflected both consumers’ decreasing assessment of their current situation and their diminished expectations about the future. However, the decline in consumers’ expectations about the future has been more pronounced. Consumers’ expectations have decreased more than their assessment of the present situation and this decline has occurred over a longer period of time. As Chart 2 illustrates, the 11.2% decrease in consumers’ assessment of their current situation that was reported in January followed five consecutive monthly increases. Over this time period, which includes the January decrease, consumer’s view of their present situation has increased by 24.8%. Excluding January’s decline, consumers’ assessment of their present situation rose by 40.7%. Conversely, consumers’ expectations have experienced their fourth consecutive monthly decline. Since October 2012, the change in consumers’ expectations about the future has decreased by 29.1%.

The continuation of consumers’ diminishing expectations may reflect their anticipation of a decline in income. As Chart 3 illustrates, consumers’ expectations of future improvements spanned each category addressed by the survey. As Chart 3 illustrates, the percentage of consumers expecting business conditions to improve fell by 2.7 percentage points, while the share of consumers expecting employment to expand declined by 3.6 percentage points. In addition, the proportion of respondents expecting their income to increase fell by 2.0 percentage points. However, the shrinking fraction of consumers expecting an increase in these categories did not automatically translate into a growing portion of consumers expecting a decrease. For example, fewer respondents reported that they expect business conditions to worsen while the share of respondents expecting a decrease in employment ticked up only slightly. Instead, a growing percentage of consumers believe that business and employment conditions will remain about the same in the next six months, an increase of 3.2 and 3.5 percentage points respectively. However, the contraction in the proportion of respondents expecting higher income in the next six months may reflect a higher portion of respondents expecting lower income in the near future. Between December 2012 and January 2013, the share of consumers expecting their income to decline in the next six months rose by 3.8 percentage points while the proportion of respondents expecting their income to remain about the same declined by 1.8 percentage points.