UF study: Gas price and interest rate hikes sink consumer confidence

February 28, 2006

GAINESVILLE, Fla. — Florida’s consumer confidence fell eight points in February to 87, reflecting pessimism about higher gas prices and rising interest rates, which are beginning to hurt housing sales, refinancing and home equity loans, University of Florida economists report.

The drop in confidence was broad-based, with declines in all five components of the index. The largest decrease was in expectations about U.S. economic conditions over the next five years, which plummeted 11 points to 79. Perceptions of U.S. economic conditions over the next year dropped eight points to 78. Perceptions of personal finances now compared with a year ago fell seven points to 81. Perceptions as to whether it is a good time to buy big-ticket items, such as cars and major appliances, also declined seven points to 102. Finally, expectations about personal finances a year from now dipped five points to 94.

“We had been expecting a decline in confidence for the past couple of months and it finally came in February,” said Chris McCarty, director of the survey research center at UF’s Bureau of Economic and Business Research. “Although there have been some positive aspects to the economy recently, there have been some things looming that negatively impact the consumer.”

The biggest factors are the increase in gas prices, which now appear to be here to stay for some time, and rising interest rates, he said.

“Higher interest rates have already begun to affect housing sales, and perhaps more importantly for the consumer, opportunities for refinancing and home equity loans,” McCarty said. “Interest rates are now to a point where it does not pay for many consumers to refinance or extract equity. In addition, the increase in the value of homes has been slowing substantially in several Florida markets. This effectively removes what had been a major source of spending power for consumers.”

Little difference is apparent by age or income, a breakdown of the index reveals, McCarty said. For example, despite clear gains in the stock market during February, including a Dow index above 11,000, consumers earning more than $30,000 a year reported a seven-point decline in perceptions of personal finances, he said.

Some of this drop may stem from consumers starting to figure their 2005 taxes.

Because there was no last-minute fix by Congress, six times more households this year than last year may qualify to pay the Alternative Minimum Tax, which can mean a dramatically higher tax bill, McCarty said. Most people likely were unaware of that until they started tax preparation for 2005, he said. As many as 15 percent of returns may qualify for the AMT this year, versus less than 3 percent last year.

“Moving forward we do not expect confidence to rise much over the next several months, if at all,” he said. “In all likelihood it will go lower as gas prices continue to rise and the effect of rising interest rates and the subsequent cooling of the housing market are fully realized.”

The research center conducts the Florida Consumer Attitude survey monthly. Respondents are 18 or older and live in households telephoned randomly. The preliminary index for February was conducted from 491 responses. The error rate is plus or minus 5 percent.

Consumer confidence is designed to help predict buying patterns by measuring the mood of consumers toward purchasing. Although other economic indicators also predict buying patterns, consumer confidence tends to be available sooner.

The index is benchmarked to 1966, so a value of 100 represents the same level of confidence for the year. The value of the index is in comparing changes over time rather than looking at an isolated month.