MARCH 1980 SURVEY March 28, 1980

Surveyso fConsume rAttitude s

Richard T.Curtin , Director §> CONSUMER SENTIMENT FALLS TO NEW RECORD LOW LEVEL

**In the March 1980 survey, the Index of Consumer Sentiment was 56.5,dow n more than 10 Index-points from February 1980 (66.9) and March 1979 (68.4), and represents the lowest level recorded in more than a quarter-century. At no time have consumers been more pessimistic about their ownpersona l financial situation or about prospects for the economy as a whole. Importantly, the major portion of these declines were recorded prior to President Carter's latest inflation message just 10 percent of the interviews were conducted after Carter's speech.

**Among families with incomes of $15,000 and over, the Index of Consumer Senti­ ment was 51.3 in March 1980,dow n from 60.2 in February 1980, and 65.2i n March 1979. TheMarc h 1980 Index figure of 51.3 is below the prior record low of 53.6 recorded in February 1975.

**New record low levels recorded in March 1980include :

*Near1y half (48 percent) of all families reported in March 1980 that they were worse off financially than a year earlier, twice the propor­ tion whoreporte d an improved financial situation (24 percent).

*Three-in-four respondents (76 percent) expected bad times financially for the economy as a whole during the next 12 months, while just 14 percent expected improvement.

^Interest rates were expected to increase during the next 12 months by 71 percent of all families in March 1980an d the highest rates of expected inflation were recorded during early 1980, with consumers expecting inflation to average 12% during the next 12 months.

**Favorable attitudes toward buying conditions for household durables declined significantly in the March 1980 survey, while attitudes toward buying con­ ditions for houses declined by a more moderate amount, and buying conditions for automobiles remained largely unchanged from month earlier readings.

* *

The establishment of new record lowlevel s in consumer attitudes and expectations indicates further weakened prospects for consumer sales throughout the balance of 1980. Byth e time Carter announced credit controls, high inter­ est rates and tight credit conditions had already greatly depressed attitudes toward buying conditions, not only for houses and vehicles but also for house­ hold durables. Since credit cards are frequently used for purchases of household durables, the likely impact will be to quickly depress sales of durables.

Monitoring Economic Change Program Institute for Social Research • P.O. Box 1248 • Ann Arbor, Michigan 48106 • (313) 763-5224 -2-

New Record Lows

The March 1980 Index figure of 56.5 is below the prior all-time record low of 58.0 recorded in Febraury 1975. As shown in the accompanying table, four of five Index components were less favorable in March 1980 than the prior record lows recorded in late 1974 and early 1975. The only excep­ tion involved attitudes toward market conditions for household durables, which remains 20 Index-points above record lows. Favorable buying attitudes have been based on buy-in-advance price rationales, although recent surveys have signaled the rising importance of credit considerations in spreading unfavor­ able attitudes. The recently announced credit controls are likely to cause further declines in buying attitudes toward household durables, in addition to the growing impact on the housing and vehicle markets.

TABLE A

Index Components5 Current Expected Personal Buying Personal 12-Month 5-Year Index Finances Conditions Finances Business Business

October 1974- February 1975 Low 58,. 0 81 9o 99 45 47

March 1980 Survey 56,, 5 76 116 92 38 41

Difference -1, .5 -5 +20 -7 -7 -6

aTable entries are the sample proportion giving favorable replies minus the proportion giving unfavorable responses, plus 100. -3-

Personal Finances Reach Record Low

During the first three months of 1980, evaluations of personal finan­ cial progress have turned sharply pessimistic. In March 1980, just 24 percent reported that their families were better off financially compared with a year earlier, down from 30 percent in February and 34 percent in January 1980. Similarly, reports of worsening personal finances rose from 38 percent in January to 45 percent in February and 48 percent in March 1980. Underlying this shift, fewer respondents mentioned income increases (from 34 percent in January to 25 percent in March 1980), and more frequently mentioned the finan­ cial strain caused by higher prices (from 39 percent in January to 47 percent in March 1980).

Expected changes in personal finances have also become more unfavorable in early 1980, and have nearly reversed the entire improvement recorded in the last half of 1979. Among all families, 20 percent expected to be better off financially in a year (identical with the July reading, but down from 28 per­ cent in January 1980), and 28 percent expected to be worse off financially (identical with July 1979, but above the 22 percent in January 1980). This bleak outlook for personal finances is based on the expectation that future price increases will exceed increases in family income. In March 1980, 56 percent of all families expected real income declines during the next year, the largest proportion recorded during the past four years.

Favorable Business Expectations Reach Record Low

Since mid-1979, news of recent business developments heard and re­ called by respondents has remained overwhelmingly negative in each of the monthly surveys. By March 1980, reports of unfavorable news items exceeded favorable items by a margin of 82 to 11 percent. One-in-four families (one- in-three among high income families) mentioned interest rate increases and tight credit in the March 1980 survey.

Current business conditions have been viewed unfavorably by the majority since mid-1979. Among all families, 69 percent reported that busi­ ness conditions were worse than those of a year earlier, somewhat above the 65 percent recorded in July 1979, and significantly less favorable than the 47 percent recorded in March 1979. Just 15 percent of all families reported in March 1980 that business conditions had improved during the past year, down from 22 percent in July 1979, and much below the 33 percent recorded in March 1979.

Growing pessimism concerning expected future changes in business conditions was recorded in the March 1980 survey, which reversed the improvement in short term business expectations since mid-1979. Among all families, 42 percent expected business conditions to worsen in the year ahead, up from 27 percent in February 1980, and 38 percent in March 1979. Just 14 percent of all families expected business conditions to improve during the next 12 months, down from 21 percent in February 1980, but slightly above the 10 percent in March 1979.

Combining respondent reports about past and expected changes in business conditions indicates that one-third of all respondents reported business conditions were worse than a year ago and expected them to further worsen in the year ahead. Reports of cumulative declines increased signifi­ cantly in the March 1980 survey (32 percent) from February 1980 (22 percent), and March 1979 (24 percent).

More families expected bad times financially in the economy as a whole during the next one year and five year periods than ever before recorded in these surveys. Among all respondents, 76 percent expected bad times financially in the economy during the next 12 months, UD from 67 percent in February 1980 and 63 percent in March 1979. Good times financially were expected by just 14 percent of all families in March 1980, down from 22 percent in February 1980 and 20 percent in March 1979. Short term business expectations were already at greatly depressed levels in the March 1979 survey, with three times as many respondents expecting bad times rather than good times financially; by March 1980, five times as many respondents expected bad rather than good times financially.

In March 1980, 72 percent of all families reported that they expected bad times financially in the economy as a whole during the next 5 years, a new record level. Favorable long term business prospects were held by just 13 percent of all families in the March 1980 survey, down from 21 per­ cent in February 1980, and 16 percent in March 1979. The March survey reverses the entire improvement recorded in long term business expectations since mid-1979. -5-

Record High in Interest Rate Expectations

Interest rate expectations grew sharply less favorable in the March

1980 survey, conducted largely before Carter's credit controls message, with more families now expecting increases in interest rates than ever before recorded. Following the October 1979 monetary policy announcement, inter­ nest rate expectations improved considerably, with the proportion expecting increases falling from 62 percent in November 1979 to 40 percent in December 1979. Since then, the expectation of increasing rates has risen to 71 per­ cent in March 1980 from 47 percent in February and 45 percent in January 1980. Similarly, the proportion of respondents expecting declines fell from 34 percent in December 1979 to 10 percent in March 1980.

Expected changes in unemployment grew less favorable in March 1980, with 57 percent of all families reporting that they expected increases in unemployment during the next 12 months, up from 46 percent in February 1980, and 41 percent in March 1979. Unemployment was expected to decline by just 7 percent of all families in March 1980, down from 13 percent in February 1980.

In March 1980, 53 percent of all families expected prices to increase by 10% or more during the next 12 months, up from 50 percent in February 1980, and just 36 percent in March 1979. Overall, consumers expect prices to increase by 12% on average during the next 12 months in March 1980, up from 10.7% in February, and 9.7% in March 1979.

Confidence in government economic policy to combat inflation and unemployment declined in the March 1980 survey, nearly reversing the improvement recorded since mid-1979. In March 1980, 43 percent of all families rated government economic policy as poor, up from 34 percent in February 1980, and 36 percent in March 1979. Confidence in government economic policy was somewhat less favorable in July 1979 (48 percent rated policy as poor, the highest level recorded under the Carter administration.) -6-

Attitudes Toward Market Conditions Decline

Unfavorable attitudes toward buying conditions for durable goods in­ creased sharply in March 1980, reversing the January and February gains. Although the majority (54 percent) continue to hold favorable buying attitudes, 38 percent of all families reported unfavorable buying conditions for durables in March, up significantly from 26 percent in February 1980 and 25 percent in March 1979. The increase in unfavorable ratings was marked by greater con­ cern over high prices and high interest rates. In March 1980, 16 percent of all families reported unfavorable buying attitudes because of tight credit and high interest rates, compared with just 4 percent a year ago. Buy-in- advance rationales increased from 33 percent in February 1980 to 43 percent in March, while mentions of good buys being available at low prices declined from 23 percent in February to 12 percent in March 1980.

Attitudes toward buying conditions for houses were somewhat less favorable in March than February 1980, and remain at greatly depressed levels. Thirty-two percent of all families report favorable buying con­ ditions for houses compared with 36 percent in February and 50 percent in March 1979. Unfavorable buying conditions were reported by 62 percent of all respondents in March 1980, compared with 59 percent in February 1980 and 39 percent in March 1979.

Favorable buying attitudes for vehicles were held by 45 percent of all families in March 1980, identical to the proportion reporting unfavor­ able buying conditions. The March reading is unchanged from the February 1980 survey, although somewhat less favorable than year ago readings. Compared with a year ago, respondents more frequently mentioned that favor­ able assessments were based on the availability of good buys at low prices (from 5 to 14 percent) and new fuel efficient models (from 7 to 13 percent). Buy-in-advance price rationales were mentioned less frequently in March 1980 (22 percent) than in March 1979 (35 percent). In explanation for unfavorable ratings, high interest rates and tight credit conditions were mentioned by 17 percent of all families in March 1980, up from 6 percent in March 1979. • * *

707 interviews were conducted between February 28 and March 23, 1 980. "^^ffffl r * Surveys of Consumer Attitudes

^STVOF^ Richard T. Curtin, D/rector

March 1980

SPECIAL ANALYSES

COPING WITH INFLATION AND THE USE OF CREDIT CARDS

Enclosed are two special reports. "Coping with Inflation"

describes how the inflationary environment has promoted the belief

that it is better to borrow and a bad idea to save in times of rapid

inflation, especially among high-income families.

The working paper on "Changes in Credit Card Use During 1978"

from the Survey of Consumer Finances updates the 1977 data on credit

card use. Credit cards were used more frequently in 1978, especially

bank cards. The proportion of monthly income owed by families with

outstanding credit card balances increased from an average of 34^ in

1977 to 41% in 1978. The largest increase occurred among middle-

income and middle-aged families.

Monitoring Economic Change Program Institute for Social Research • P.O. Box 1248 • Ann Arbor, Michigan 48106 • (313)763-5224 Survey Research Center March, 1980 Monitoring Economic Change Program

COPING WITH INFLATION

Richard T. Curtin

Inflation is one economic fact of life with which consumers are well aware. In recent nationwide surveys, consumers have named inflation as

the number one problem facing the nation, as well as the most important prob­

lem facing their families. Although rapid price increases have aroused pub­

lic outcry since the late 1960s, until recently double-digit inflation was

viewed as a temporary aberration, not as a long-term prospect. The persis­

tent inflationary environment has had a pervasive impact on consumers more

than just on their financial situation. Inflation has now become a primary

factor in shaping consumer spending and saving decisions.

Consumers can react to inflation-pinched budgets by increasing

household income, through increased labor force participation, for example,

or by changing how they spend their income, including how much they save

or take on debt. Although the rise of dual-earner households has been an

important coping response to inflation, this short report focuses only on

consumer reactions to inflation which center on spending and saving deci­

sions, not on how households have attempted to increase their incomes.

How successful have consumers been in coping with inflation? In

the summer of 1979, the majority (60 percent) of respondents reported that

their families had managed to stay even or had gotten ahead of inflation.

Despite the frequent and often bitter complaints about inflation by the I -2-

jority, only a substantial minority actually felt that they were financially

hurt bj inflation. The majority were apparently able to cope with inflation

with some success.

Two-thirds of upper income families reported that they had stayed

even or ahead of inflation, compared with about half of lower income fami­

lies. As shown in Table 1, respondents under age 25 were more likely to

report staying even or getting ahead of inflation, with no significant

differences among those over age 25. Interestingly, college-educated re­

spondents were less likely to report staying even or ahead of inflation (52

percent), as compared with those with less than a high school education

(63 percent). Although income and education are closely associated, these

variables demonstrated opposite relationships to perceptions of being hurt

by inflation, and indicate greater perceived hardship among those with rela­

tively high education and those with low incomes.

Price Comparisons

Rapid inflation has heightened comparative price-shopping behavior

on the part of consumers. More than two-in-three consumers reported infla­

tion had changed the way they shop, and half reported that they now more fre­

quently shop around for a low price. More frequent price comparative shop­

ping was reported by the near-majority throughout most major population

subgroups (see Table 1).

Although comparative shopping enables consumers to make better

spending decisions, this reaction alone cannot offset the impact of general

and sustained price increases. The classic coping mechanism is for consumer

spending decisions to change in response to relative price changes. Higher -3-

gasoline prices, for example, can be accommodated within a fixed income by decreased gasoline consumption or by decreasing consumption of other goods and services. To the extent that consumers cut down or stop buying items which have had particularly large price increases, they can cope with infla­ tion by shifts in spending patterns. As shown in Table 1, this shift repre­ sented a widespread and pervasive coping response, as more than two-thirds of all families reported that they had cut down or stopped ouying items which have had particularly large price increases. High-income families somewhat less frequently reported this coping response (61 percent) than low-income families (76 percent), reflecting greater income discretionand more frequent income increases. The elderly, those over age 65, were less likely to report changed spending habits, reflecting in part more limited discretion in their budgets. College-educated respondents were the least likely to report coping with inflation by reduced purchases (60 percent), while those with less than a high school education were the most likely to report this response (75 percent).

Advance Buying

As a second type of reaction to inflation, consumers respond by increasing purchases in anticipation of future price increases, rather than decreasing purchases. Advance buying as a means to cope with inflation was viewed with favor by 25 percent of all families in September 1979. This favorable view toward advance buying was widely shared among all income and education subgroups. Advance buying was viewed with more favor by the young, with nearly one-third of those under age 25 favoring advance buying, in com­ parison with one-fifth among those over age 65. -4-

Saving and Debt

Spending decisions have also been affected by attitudes toward

saving and debt. The appeal of savings and the distaste for debt has been

significantly affected by the inflationary environment. Among all families,

24 percent felt it was a bad idea to save as much as possible during times

of rapid inflation, and 14 percent of all families felt it was better to

borrow as much as possible in times of inflation. Attitudes toward saving

and debt varied significantly among demographic subgroups. The appeal of

saving and the avoidance of debt was highest among the elderly, low-education,

and low-income families. In contrast, high-income families and college-

educated respondents, subgroups responsible for a large share of aggregate

saving and debt, were most likely to express the opinion that it was better

to borrow and a bad idea to save in times of rapid inflation. Among fami­

lies with incomes of $25,000 or more, one-third reported it was a bad idea

to save as much as possible with rapid inflation, and one-fourth reported it was better to borrow as much as possible in times of inflation.