Commentary

Spend A Little, Save A Little Is the Consumer Plan

Spend A Little, Save A Little Is the Consumer Plan

The downward momentum in consumer confidence came to a halt in August due to offsetting changes. "It should be no surprise that consumers have mixed views on the economy when mortgage rates are at their lowest level in decades and declines in stock prices have erased a substantial fraction of their wealth," according to Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. As a result, consumers reported that they wanted to spend more as well as to save more. "Low interest rates have kept home and vehicle buying attitudes near record levels, but apprehensions about their future financial situation have made consumers less willing to purchase other goods and more intent on saving for their retirement," Curtin added.

The Index of Consumer Sentiment was 87.6 in the August 2002 survey, its lowest level recorded in eight months, and nearly identical with its fifty year average of 87.9. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 80.6 in August, insignificantly below the 81.0 in July.

One-in-three households reported that their finances had worsened in August, the largest proportion recorded in ten years. References to declines in wealth were three times higher in August than following the 1987 stock market crash. When asked to explain how their finances had changed, one-in-ten consumers spontaneously mentioned declines in the value of their assets. "References to declines in household wealth were more frequent in August than at any other time in the fifty year history of these surveys," according to Curtin.

"The declines in stock values have caused consumers to redouble their efforts to save more out of their current incomes to help secure a comfortable retirement," said Curtin.

In the August survey, just one-in-seven consumers expected the national economy to worsen during the year ahead, despite the fact that three-in-four consumers held more negative views on current economic conditions. Consumers expressed the least confidence in government economic policies since President Bush first entered office. Nonetheless, the current level of confidence in economic policies is still quite favorable compared with prior Presidents.

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