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Updated 9:30 AM September 8, 2009

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Consumers expect economy to improve

Consumers increasingly expect the economy to improve in the months ahead even as they report the worst assessments of their personal finances since the Great Depression, according to the Reuters/U-M Surveys of Consumers.

"Consumers were more likely to report hearing about positive economic developments in August, and more likely to expect the economy to improve during the year ahead," says Richard Curtin, director of the monthly consumer confidence survey that was released Aug. 28. "Unfortunately, this first ray of optimism was accompanied by the grimmest assessment by consumers of their personal finances since the Great Depression."

Although the economic recovery is likely to have already started, consumers' spending will remain in low gear for an extended period of time. Curtin pegged the growth of total personal consumption expenditures at just 1.6 percent during 2010.

"The problem looming on the horizon is that after the inventory correction and the exhaustion of the stimulus, consumer demand will not be strong enough to maintain a robust pace of economic growth after mid-2010," Curtin says.

The Index of Consumer Sentiment was 65.7 in the August survey, just less than the 66.0 in July and the 67.5 in last year's August survey. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 65.0 in August, up from 63.2 in July and significantly above the 57.9 recorded last August. The Current Economic Conditions Index fell in August to 66.6, down from 70.5 in July and 71.0 last August.

The key August change was in the job situation.

"News of job losses declined significantly, with the August survey tallying less than half the reports of job losses recorded just six months ago," Curtin says.

Consumers believed the unemployment rate was nearing its cyclical peak, although most thought it would still increase to just above 10 percent.

"Although consumers expect the employment situation to stabilize, they do not expect sustained gains in employment during the year ahead," Curtin says.

Despite these hopeful signs, consumers still provided a grim assessment of their finances. "Just 16 percent of all consumers reported that their finances had improved, the smallest proportion recorded since this question was first asked in 1946," Curtin says.

Moreover, just one-in-four consumers anticipated any income gains during the year ahead as the majority expected declining or stagnating incomes. Even with low inflation, just 13 percent anticipated any inflation-adjusted income gains during the year ahead.

At this stage in past recoveries, households have typically sensed that renewed gains in incomes and jobs were on the horizon, and were eager to take advantage of discounted prices and the available credit, particularly for purchases of homes, vehicles and other household durables.

The survey continued to document an all-time record number of consumers that cite the widespread availability of discounted prices. Unfortunately, the recession was far from normal in its impact on the financial situation of households as well as its impact on credit availability.

"Rather than pursuing discounts, the rebound in spending will be constrained by uncertainty about future jobs and incomes as well as the reduced availability and higher cost of credit," Curtin says.

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