The sharp drop in gas prices in September created a surge in consumer estimations of current personal finances and evaluations of the local economy. Now that lower gas prices have had time to sink in, the excitement has abated somewhat, and consumer attitudes have returned to average yearly levels.
T.J. Marta, Strategist, RBC Capital Markets

The surge in optimism U.S. consumers felt in September as a result of falling gas prices abated somewhat this month. This according to the most recent consumer survey by Ipsos. Consumers’ short-term euphoria did not translate into longer-term optimism about the state of personal finances as consumer sentiment dropped nearly 11 points in October. As a result, the RBC CASH Index, released today by RBC Financial Group, declined to 83.1 this month, compared to 93.7 in September and 74.8 in August.

“Despite moderate declines in the overall index and current conditions sub-index, the figures remain robust,” said T.J. Marta, Economic and Fixed Income Strategist for RBC Capital Markets. “Gasoline prices continue to fall, reaching their lowest level since March, and mortgage rates have fallen towards their lowest level since January. Additionally, hourly wages and overall incomes remain strong, and all of this points to a healthy consumer and a soft landing for the U.S. economy.”

The RBC CASH Index is a monthly national survey of consumer attitudes on the current and future state of local economies, personal finance situations, savings and confidence to make large investments. Highlights of the survey results include:

Consumer sentiment regarding the current state of the local economy and current personal finances returned to yearly average levels in October, after hitting a high point in the wake of decreasing gas prices last month. That exuberance has tempered somewhat – currently one quarter (24 per cent) of American consumers rate their local economy as strong, compared to 27 per cent in September.

Consumer sentiment on the state of current personal finances shifted even more, with one quarter (25 per cent) rating their current personal financial situation as strong (compared to 33 per cent in September) and one quarter (26 per cent) rating current finances as weak (compared to 20 per cent last month). This represents a shift back to 2006 average levels.

Driven primarily by the decline in confidence regarding current finances, consumer sentiment regarding investment also dipped in October 2006. A slight softening of comfort in purchasing also contributed to the overall decline in Americans’ investing sentiment. As a result, the RBC Investment Index for October stands at 87.2, down nearly 23 points from 110.0 in September. Nearly one third (32 per cent) of Americans report they are more comfortable making a major purchase like a car or home in October, compared to 36 per cent last month. Comfort in making other household purchases also declined slightly this month, as 38 per cent of consumers say they are more comfortable making other household purchases, compared to 42 per cent who said they felt that way in September.

Consumer optimism regarding expectations about the future held steady this month. The RBC Expectations Index stands at 39.8, compared to 39.4 in September. Overall sentiment regarding expectations for local economies remained the same in October as it had last month, with 21 per cent believing the local economy will be stronger six months from now. Similarly, expectations for personal finances also held steady in October, with nearly four in ten Americans (37 per cent) believing their personal financial situation will be stronger six months from now (compared to 35 per cent last month).

Consumer confidence regarding job security held steady for the second consecutive month. Four in ten (41 per cent) consumers report they are more confident about current job security than six months ago (compared to 44 per cent in September 2006), while personal job loss experience remained unchanged from last month as one third (33 per cent) of consumers again reported that they or someone they know personally have lost their job as the result of economic conditions. Additionally, expectations regarding future job loss remained low in October, with only one in five (18 per cent) consumers reporting future job loss is likely (compared to 19 per cent last month).

While the overall RBC CASH Index, along with the RBC Current Conditions Index and the RBC Investment Index, declined this month, consumer confidence in October is largely a picture of readjustment, rather than increasing pessimism. “The sharp drop in gas prices in September created a surge in consumer estimations of current personal finances and evaluations of the local economy. Now that lower gas prices have had time to sink in, the excitement has abated somewhat, and consumer attitudes have returned to average yearly levels,” added Marta.