Americans generally say they are more confident in the economy’s health. But that doesn't mean they will spend more.
By some measures, Americans’ confidence in the economy has recovered to prerecession levels, and though multiple reports forecast that holiday retail spending will rise to a three-year high, that’s not saying much. The projected 4 percent increase in holiday spending is set against a disappointing season last year, when the federal government shut down and a blast of frigid weather kept shoppers indoors.
“It just goes to show how modest our expectations have become,” said Greg McBride, chief financial analyst for Bankrate.com. “Where is the money going to come from? Consumers don’t have additional spending power and are very averse to piling on credit card debt.”
Americans’ confidence in the economy rose in October to the highest level since 2007, according to a survey of households released Friday by Thomson Reuters/University of Michigan. The preliminary October index of consumer sentiment rose to 86.4 from the final September reading of 84.6.
According to the index, consumers’ collective view of the economy has been growing more optimistic every month since July 2013. This month, falling gasoline prices and rising employment are offsetting fears of the Ebola outbreak, forecasts of a global economic growth slowdown and the steep descent in stock markets, though the most recent losses in markets haven’t been fully factored in to sentiment yet.
But another closely watched measure of consumers’ feelings toward the economy, the consumer confidence index by the Conference Board, offers a less rosy assessment. The index dropped in September after four months of straight improvement. Fewer Americans said jobs were “plentiful” than a month before and more said they expected business conditions to worsen over the next six months. And while a greater share of consumers said they expected their incomes to rise that month, a greater share also expected a drop in income vs. the previous month. The Conference Board forecasts consumer spending will grow 2.3 percent this year, 0.1 percent less than last year and barely stronger than price level increases of about 2 percent.
The two measures, sentiment and confidence, often differ from each other month-to-month but tend to track together over the long term, said Chris Christopher, director of U.S. Consumer Economics for IHS Global Insight.
“They’re good indicators of people buying certain things” such as cars and other big-ticket items and, to a lesser extent, clothing, “and that’s about it,” Christopher said. “For overall consumer spending, it’s not such a good indicator.”
“How people feel is a lot different than the kind of actions they take,” he added.
On Wednesday, the Commerce Department reported that retail sales (excluding autos) fell 0.2 percent in September from August, missing expectations that sales would rise by 0.3 percent. Strong consumer sentiment also seemed to indicate that spending would increase. Electronics sales surged on the strength of the new iPhone 6, but that caused consumers to pull back spending in other areas -- and they already spent more than economists expected on back-to-school shopping and on cars in August.
The data fall in line with a recent Bankrate.com survey that found two-thirds of Americans are restricting their spending, even while feeling better about the economy.
“People are feeling better but not seeing it in their paycheck. People feel more secure in their jobs, the value of their home is increasing, 401(k)s have increased as the stock market moved up -- really the only thing missing is wage growth,” McBride said.