Surveyso f Consumer Attitudes 0 ^""^flffi: f Monitoring Economic Change Program

F. Thomas Juster, Director George Katona, Founder Richard T. Curtin, Director ' Monitoring Economic Change Program Consumer Survey Program Surveys of Consumer Attitudes

May 1979 Quarterly Survey June 11, 1979

INFLATION AND ENERGY PROBLEMS HEIGHTEN PESSIMISM

Page

HIGHLIGHTS 1

Widespread Declines Recorded 2

Double-Digit Inflation Expected 4

Personal Prospects Pessimistic 5

Business Prospects Weaken 6

Buying Attitudes Weaken 8

Inflation Prompts Divergence in Attitudes 9

Summary Outlook 12

ATTACHMENTS:

May Tables and Charts

Outstanding Debt Among American Households

Consumer Evaluations of Credit Transactions

ERRATA: In Table 26, "new fuel efficient models" is incorrectly listed as a negative response when it should appear as a reason why it is a good time to buy a car. * * *

The May 1979 Survey included 1,251 interviews conducted between April 25 and , 1979.

Institute for Social Research • P.O. Box 1248 • Ann Arbor, Michigan 48106 • (313)763-5224 -1-

Highliqhts

* In the May 1979 Survey, the Index of Consumer Sentiment was 68.1, down almost 6 Index-points from the survey, and almost 15 Index-points below May 1978.

* The largest declines from 3 months ago were among families with incomes of $15,000 or more (with the Index falling to 62.1 from 70.9), and the largest declines from a year ago were among households with heads aged 18 to 34 (where the Index declined from 95.1 to 74.6).

* Price expectations continue to heighten. In May 1979, 45 percent of all families (54 percent among high-income families) expected prices to go up by 10 percent or more during the next 12 months, up from 26 percent who held a similar view in May 1978 (33 percent among high-income families). In May 1979, consumers expected prices to go up by 11.4%, on average, somewhat above the 10.7% recorded in February 1979, and significantly above the 8.2% recorded in May 1978.

* Evaluations of personal finances worsened sharply among high-income families. In May 1979, 37 percent of all high-income families said they were better off financially than a year ago, down from 50 percent in February 1979. More frequent complaints about high and rising prices account for the growth in unfavorable evaluations.

* Despite the near majority (48 percent) who expect prices to go up by more than their incomes during the next year, fully one in four respondents expect their nominal income to go up by 10 percent or more during the next year. Compared to a year ago, expected income increases have helped to offset the impact of rising prices on personal financial evaluations.

* The majority continue to expect bad times in the economy as a whole during the next 12 months (63 percent) and 5 years (57 percent). Perceptions of the path of the economy have worsened significantly since February. Consumers also more frequently expect business conditions to worsen during the year ahead in May 1979 (37 percent) than in May 1978 (21 percent).

* Attitudes toward buying conditions for automobiles are now less favorable than a year ago. In May 1979, 39 percent of all families rated buying conditions for cars favorably, down from 50 percent in May 1978. Unfavorable evaluations were held by 48 percent of all respondents in May 1979, up from 32 percent in May 1978. Widespread Declines Recorded

In the May 1979 Survey, the Index of Consumer Sentiment was 68.1, down almost 6 Index points from the February 1979 Survey (73.9), and almost 15 Index points below May 1978. The Index of Consumer Sentiment has now declined 21 Index points since reaching its May 1977 peak of 89.1.

The Index value among families earning $15,000 or more was 62.1 in May 1979, down 8.8 Index points from February 1979 (70.9), and down 12.6 Index points from May 1978 (74.7). This decline was more pronounced among families earning $20,000 or more, whose Index value was 73.5 in May 1979, down 10.8 Index points from February 1979 (84.3), and 12.6 Index points from May 1978 (87.1).

In comparison, among families with incomes of less than $15,000, the May 1979 Survey recorded an Index value of 66.4, down just 1.9 Index points from February 1979 (68.3), but nonetheless down 14,1 Index points from May 1978 (80.5).

The loss in confidence has been widespread across income subgroups during the past two years. Although nearly one-third of the loss recorded among high income families was recorded during the three month period from February to May 1979, the overall two-year loss is nearly identical for families earning less than $15,000 (19.2) and for families earning $15,000 or more (22.0)—see text table A on next page.

The decline in confidence has also been widespread across age subgroups. Although each age groups posted similar overall declines during the past two years, nearly the entire loss in confidence among those under age 35 was recorded during the past year, when their Index value declined from 95.1 to 74.6--a loss of more than 20 Index points. Middle age respondents posted a higher rate of decline during the three month period February 1979 to May 1979, falling from 74.6 to 65.3.

In May 1979, the Index of Consumer Sentiment recorded nearly identical readings in each region: the Northeast (64.9), the North Central (68.2), the South (69.1), and the Western region (69.6). Although the overall two-year decline in each region has been similar, nearly the entire decline in the Western region was recorded during the past year in comparison to significant declines from May 1977 to May 1978 within other regions. During the three month period from February to May 1979, the decline in the West and North Central regions was somewhat greater. Table A

Recent Changes in the Index of Consumer Sentiment

ICS Components Region Aqe Family Income North North ICS Current Expected East Central South West 18-34 35-54 55+ <15,000 >15,000

Current Level May 1979 68.1 88.7 54.9 64.9 68.2 69.1 69.6 74.6 65.3 64.1 66.4 62.1

Three Month Comparison Feb. 1979-May 1979 -5.8 -3.5 -7.3 -3.1 -7.6 -4.4 -7.9 -6.3 -9.3 -3.6 -1.9 -8.8 i CO One Year Comparisons May 1977-May 1978 -6.2 -1.8 -9.2 -8.4 -7.4 -7.1 -0.7 -2.5 -10.2 -5.9 -5.1 -9.4

May 1978-May 1979 -14.8 -8.8 -18.1 -14.8 -13.4 - 15.2 -16.8 -20.5 -13.6 -10.4 -14.1 -12.6

TWO YEAR TOTAL LOSS -21.0 -11.3 -26.9 -23.2 -20.8 - •22.3 -17.5 -23.0 -23.8 -16.3 -19.2 -22.0 -4-

Although the May 1979 Survey marks the second year of decline, the Index declined by almost twice as much during the past year (15 Index points) compared with the prior year (6 Index points). The much smaller decline recorded from May 1977 to May 1978 resulted from growing pessimistic expectations being par­ tially offset by continued favorable evaluations of current economic conditions. Evaluations of current economic conditions registered only minor and insignificant declines from May 1977 to May 1978 (102 to 98.2), in comparison with significant declines in favorable expectations (81.8 to 73.0). From May 1978 to May 1979, favorable evaluations of current economic conditions have significantly declined (98.2 to 88.7), and declines in favorable expectations have accelerated (73.0 to 54.9).

Double-Digit Inflation Expected

Price expectations have greatly heightened during the past year. In May 1979, 91 percent of all families expected prices to increase during the next year, up from 85 percent in May 1978. Almost 70 percent of all families expected prices to increase by five percent or more in May 1979 (53 percent in May 1978), and 45 percent of all families expected prices to increase by ten percent or more in May 1979 (26 percent in May 1978). On average, consumers expected prices to increase by 11.4% in May 1979, up from 10.7% in February 1979, and 8.2% in May 1978. This represents the highest mean expected price increase ever recorded in these surveys. Only in one previous quarter (November 1974) did the average expected price increase exceed 10%. Moreover, the May 1979 reading is the second consecutive quarterly reading above 10%.

Expected changes in both unemployment and interest rates continued to grow unfavorable. Among all families, 40 percent expected employment to increase during the next twelve months, up from 26 percent in May 1978. Just nine percent of all families in May 1979 expected unemployment to decline during the next year, down from 23 percent a year ago. Interest rates are expected to go up by 61 percent of all families in May 1979, up from 56 percent in May 1978.

Despite expectations of rising unemployment as well as inflation, infla­ tion rather than unemployment continues to be viewed as the more serious econo­ mic hardship facing the nation. The proportion giving priority to unemployment has fallen to 18 percent in May 1979 from 26 percent in May 1978, while the priority accorded inflation increased to 68 percent in May 1979 from 63 percent in May 1978. -5-

Personal Prospects Pessimistic

Since the beginning of 1979 evaluations of personal finances have grown increasingly pessimistic. Fewer households reported being better off financially than a year ago in May 1979 (31 percent), than in February 1979 (34 percent) and May 1978 (36 percent). Households more frequently reported being worse off financially in May 1979 (40 percent) than in May 1978 (31 percent). When asked why they were better or worse off financially, 43 percent of all families spon­ taneously mentioned high prices as making them worse off, up from 33 percent in February 1979, and 27 percent in May 1978. The proportion of families who reported being better off financially because of past income increases has remained largely unchanged during the past year.

A similar pattern of change was recorded among families with incomes of $15,000 and over. From May 1978 to May 1979, mentions of higher prices making them worse off increased from 28 to 44 percent, while favorable mentions of higher incomes making them better off remained unchanged at 41 percent.

When asked how they expected their financial situation to change during the next year, more households reported in May 1979 that they expected to be worse off financially (26 percent) rather than better off (21 percent). Just one-in-five households in May 1979 expected to be better off financially in a year, down from more than one-in-four a year ago. At the same time, the pro­ portion of families who expected to be worse off in a year increased from 17 percent in May 1978 to 26 percent in May 1979. This is a new record low reading, and representa a more pessimistic outlook for personal finances than recorded at any time during the 1974-75 recession.

The majority of all respondents in May 1979 (61 percent) expected their family income to increase during the next twelve months. One-in-every-four families expected their income to go up by ten percent or more during the next year, and an additional one-in-four expected income increases in the range of five to nine percent. This favorable level of reported income expectations is unchanged from May 1978.

Despite these favorable income expections, nearly the majority (48 percent) expected prices to go up by more than their family income during the next twelve months, while just 11 percent expected income increases to exceed price increases. Although expectations are now severely depressed, it is not for } lack of expected income increases, but because these income increases are ex­ ceeded by expected rates of inflation.

The spread of pessimistic financial evaluations is indicated by the declining number of households who report cumulative financial gains and the increased frequency of cumulative deterioration in household finances. In May 1979, just nine percent of all families reported that they were better off and expected to be better off financially in a year, down from 16 percent in May 1978. In comparison, 17 percent of all families reported being both worse off than a year ago and expected to be worse off financially in a year in May 1979, compared with just 9 percent in May 1978.

Business Prospects Weaken

During the past year, news heard and recalled of recent developments in business conditions has grown increasingly negative, and in May 1979 more than three times as many unfavorab)e as favorable reports of business developments were recorded (62 versus 18 percent). When asked what news they had heard, respondents mentioned inflation and energy problems more frequently in May 1979 than a year ago. Inflation was mentioned as having an unfavorable impact on business conditions by 18 percent in May 1979, up from 11 percent a year ago. In May 1979, more respondents mentioned the energy crisis (12 percent) as having an unfavorable impact on business conditions than they did a year ago (six percent), or in May 1977 (three percent), the month following President Carter's televised speech portraying the energy crisis as the "moral equivalent of war". (Interestingly, Carter's national address was made at the approximate time of the last cyclical peak.)

Evaluations of current business conditions in May 1979 were unfavorable, representing a reversal from a year ago. In May 1979, 50 percent of all families reported that current business conditions were now worse than a year ago, whereas in May 1978, nearly half (47 percent) reported current business conditions better than a year earlier. In May 1979, just one-in-three res­ pondents rated current business conditions as better than those of a year ago.

Business conditions are more frequently expected to further deteriorate (37 percent) rather than to improve (11 percent) during the next year. Since a year ago, the balance of opinion concerning expected business conditions has -7-

grown increasingly negative. In May 1978, equal proportions (21 percent) expected business conditions to improve as to worsen, but by May 1979, expected deterior­ ation dominated improvement by a margin of three-to-one.

As with personal financial expectations, expected changes in business conditions during the next twelve months reached a new record low reading in the May 1979 Survey. The reasons respondents gave for these sharply pessimistic ex­ pectations were similar: concerns with inflation and energy. The cumulative spread of pessimistic business expectations is indicated by the one-in-four respondents who judged business conditions to be both worse than those a year ago and expected them to worsen in a year, up from one-in-ten a year ago.

In the May 1979 survey, three times as many consumers expected bad times rather than good times financially in the economy as a whole during the next twelve months. Fully 63 percent of all families expected bad times financially in the economy, up from 54 percent in February 1979 and 44 percent in May 1978. In contrast, just 21 percent expected good times financially in the economy, down from 29 percent in February 1979, and 43 percent in May 1978.

Longer term economic prospects were also quite pessimistic, with 57 percent of all respondents expecting bad times in the economy during the next five years, up from 52 percent in February 1979 and 47 percent in May 1978. Just 19 percent of all families expect good times during the next five years, down from 23 percent in February, and 26 percent in May 1978. Respondents most frequently mentioned inflation and lack of employment opportunities when evaluating longer term business prospects. However, in May 1979, more than one-in-ten mentioned energy related problems affecting longer term prospects.

More respondents gave government economic policy a poor rating in May 1979 than at any time since President Carter entered office. In May 1979, 38 percent rated government policy as poor, up from 28 percent in May 1978. Just ten percent rated government policy as good in May 1979 (five percent among high-income families). When asked in May 1977 to explain their opinions of business conditions, the expected favorable impact of government policies accounted for substantial portions of the optimism expressed about business conditions. In the May 1979 survey, similar favorable mentions were almost totally absent. -8-

Buying Attitudes Weaken

Attitudes toward market conditions for household durables and houses declined somewhat during the past year, while favorable buying attitudes toward automobiles declined more sharply.

More consumers rated buying conditions for automobiles as unfavorable rather than favorable in the May 1979 survey. Attitudes toward buying conditions for autos deteriorated significantly compared with both three month-- and year-ago readings. In May 1979, 48 percent of all families rated buying conditions for autos as unfavorable, up from 39 percent in February 1979, and 32 percent in May 1978. The proportion of all families who rated buying conditions favorably declined to 39 percent in May 1979, from 43 percent in February 1979, and 50 percent in May 1978.

A major reason given for the recent sharp decline in favorable buying attitudes involved energy related problems. Among all families, 22 percent mentioned energy problems when explaining why they thought current market condi­ tions were unfavorable, up from three percent in February 1979, and one percent in May 1978. Significantly fewer respondents mentioned buy-in-advance rationales in May 1979 (22 percent) than a year earlier (33 percent), and somewhat more frequently mentioned high prices as a cause for postponement in May 1979 (26 percent) than a year ago (22 percent).

Offsetting these negative influences on auto market evaluations, signi­ ficantly more respondents mentioned the availability of smaller and more fuel efficient cars in May 1979 (15 percent) as reasons for making it a good time to buy, up from just two percent a year ago. Although the current energy crisis has had a clearly unfavorable impact on auto buying attitudes, the smaller more fuel efficient cars nonetheless provide an attractive incentive to replace older fuel inefficient vehicles. The strength of this replacement demand will grow as gasoline prices rise, and partially offset otherwise sharper declines.

Market conditions for houses were more frequently evaluated in May 1979 as favorable (51 percent) than unfavorable (42 percent), but the extent of the favorable margin has decreased compared with a year ago. During the past year favorable evaluations declined from 56 percent in May 1978 to 51 percent in May 1979, while unfavorable evaluations rose from 35 percent in May 1978 to 42 percent in May 1979. The decline in market evaluations during the past year -9-

has been largely due to high interest rates. In May 1979, 25 percent of all families mentioned high interest rates when explaining why it was a bad time to buy houses, up from 11 percent in May 1978. Buy-in-advance rationales continued to be mentioned by one-third of all families in both May 1978 and May 1979.

Among all families, fully 62 percent rate market conditions for durable goods as favorable in May 1979, nearly identical to the 63 percent recorded in May 1978. The past year has witnessed, however, a significant rise in the pro­ portion of respondents reporting unfavorable buying conditions for durables, rising from 16 percent in May 1978 to 26 percent in May 1979. This increase in unfavorable evaluations was largely due to more frequent complaints about high prices and fewer good buys being available. Buy-in-advance rationales were recorded among 35 percent of all respondents in May 1979, up from 31 percent in May 1978. With regard to household durables, buy-in-advance rationales have not been significantly offset by high interest rates nor energy related problems, in contrast to the housing and auto market.

Among families with SI5,000 or more, evaluations of market conditions for household durables were nearly identical to a year ago. In May of 1978 and 1979, 67 percent of all high income families rated buying conditions favorably, while 20 percent rated buying conditions unfavorably in May 1979, up somewhat from the 17 percent recorded in May 1978. Buy-in-advance price rationales were recorded among 40 percent of all high income families in both May 1978 and May 1979. It is the continued strength of buy-in-advance rationales that has maintained favorable durable buying attitudes during the past year.

Inflation Prompts Divergence in Attitudes

Inflation has both severely depressed favorable expectations, and through rationales, has helped to maintain favorable evaluations of current buying condi­ tions. When the difference, or the spread, between the current and the expected subcomponents of the Index of Consumer Sentiment is calculated, the importance of inflationary expectations is highlighted. The time series profile of the spread or divergence between subcomponents is shown in Chart A.

Prior to the mid-1960s, expectations for foture improvement were more favorable than evaluations of current conditions. Since the mid-sixties, expec­ tations for change have consistently been less optimistic than evaluations of -10- current conditions. Just prior to the 1974-75 recession the extent of the divergence narrowed considerably, and reached its low point in 1976. The peak divergence recorded just prior to the 1974-75 recession was only exceeded by the May 1970 reading.

The divergence between evaluations of current and expected economic con­ ditions is highly correlated with expected price inflation (see Chart C).Th e overall time series correlation was 0.88 during the 1954-1979 period. Prior to the mid-1960s, when expected changes were more favorable than current evaluations, the expected rate of inflation remained below 3%. Since then, whenever peaks in the level of divergence between current and expected conditions were recorded, peaks were also recorded in expected rates of inflation.

Chart A SPREAD: CURRENT MINUS EXPECTED

35.0

30.0 1965:3 1972:3

20.0 o 15.0 cr. UJ D_ 10.0 CO

0.0

5,0

10,0 ; [ 1955 1959 1963 1967 1971 1975 1979 -11-

Chart B CURRENT ANDEXPECTE D COMPONENTS OFTH E ICS

120

110 1965:3 1972;3

/ 100

/ / \ \ / UJ 90 \ \ / r7 / / 80 r \ - 1 \ \ UJ7 0 \ \ \ i—' CURRENT i S 60 EXPECTED Ii i i 50

HO I i ; 1 1955 959 1963 1967 1971 1975 1979

Chart C SPREAD ANDMEA N PRICE EXPECTATIONS

1965:3 1972:3 J 10

SPREAD PRICES

-5.0 L

1955 1959 1963 1967 1971 1975 1979 -12-

Summary Outlook

Findings from the May 1979 survey indicate declining consumer sales during the balance of 1979 and early 1980. During the past year declines in the Index of Consumer Sentiment have been substantial and widespread among major population sub­ groups. Thus far,th e overall decline has been somewhat less severe than that which preceeded the 1974-75 recession, both in the rate and the overall extent of decline. The major exception involves price expectations. In the May 1979 survey, expected prices reached an all-time peak level of 11.4%, prompting new record lows inpersona l and businessexpectations .

The two major classes of consumer expenditures most closely related to the onset of a recession are housing and auto expenditures. Buying attitudes toward both markets have eroded seriously during the past year. With regard to automobiles, buy- in-advance rationales have begun to yield to postponement because of high prices, while energy problems have had more of an unfavorable than favorable impact on near- term demand. With regard to housing, buy-in-advance price rationales have not yielded to postponement because of high prices, but rather to postponement because of high interest rates.