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Consumer confidence and home-buying plans fell to their
lowest levels in more than a decade, according to the University of Michigan's Survey
of Consumers.
Consumer confidence plunged in September to its lowest level
in more than 12 years, while consumer home-buying plans also fell to 10-year
lows, according to the survey. The decline in home-buying plans was due to an
increasingly negative reaction to high home prices, as consumers expressed in
September the least favorable assessment in nearly a quarter century.
"High gas prices had a devastating impact on consumers'
budgets and caused consumers to expect a worsening financial situation during
the year ahead," said Richard Curtin, director of the University of
Michigan's Surveys of Consumers.
Over the past 50 years, such steep and widespread declines
in confidence have typically triggered recessions. "Among the prior
declines that sparked recessions, the most comparable situation was in August
of 1990, when consumer confidence fell from the about the same level, by about
the same amount, and prompted by the same steep increases in gas prices,"
noted Curtin.
The key issue is whether the rise in Federal spending due to
Hurricanes Katrina and Rita will be sufficient to offset the decline in
consumer spending. "While the economy may not be technically falling into
recession, the data indicate that consumer spending will weaken in the months
ahead," said Curtin.
The index of consumer sentiment was 76.9 in the September
2005 survey, down from 89.1 in August and 96.5 in July. The one-month decline
of 12.2 points equaled the largest monthly decline recorded since 1978; the
combined August and September decline was the largest two month decline on
record, falling a total of 19.6 index-points.
The index of consumer expectations, a closely watched
component of the index of leading economic indicators, fell to 63.3 in
September, down from 76.9 in August and 85.5 in July. The one-month decline was
the second largest and the two-month decline was the largest in the survey's
history.
Consumers expected an inflation rate of 4.3 percent during
the year ahead in September, a substantial jump from the 3.1 percent recorded
in August, and the highest inflation rate expected since 1990.
More than one-third of all consumers reported that their
financial situation had worsened, with one-in-four households citing higher
prices as the prime reason. More importantly, in the September survey consumers
held the least favorable financial prospects for the year ahead in more than a
decade.
"Just one-third of all consumers in the September
survey expected their financial situation to improve during the year ahead,"
noted Curtin.
When asked about prospects for the year ahead, more
consumers expected the economy to worsen than at any other time since 1990. Of
greater consequence to their financial situation, nearly half of all consumers
expected the national unemployment rate to rise during the year ahead. Overall,
two-thirds of all consumers expected bad times financially in the national
economy during the year ahead, which represents an increase of 20 percentage
points from last month.
"The one expectation that has not changed was the
virtual consensus among consumers that interest rates would continue to rise in
the year ahead," Curtin said.
Vehicle-buying attitudes also fell to 10-year lows in
September, due to heightened uncertainty about future gas prices. The
uncertainty over gas prices was cited by the largest proportion of consumers
since the 1979 surge in gas prices, which overwhelmed the appeal of price discounts,
according to the survey.
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