RC Poll: Va. consumer sentiment is high heading into the holiday season

Consumer sentiment remains strong in the Commonwealth despite a projected budget shortfall, replicating the mood of the country as a whole. Reportedly incomes are higher and prices are low, setting the stage for a strong holiday shopping season. The Tidewater experienced the strongest growth in sentiments after its drop off over third quarter of 2014. Short-term inflation expectations dropped six basis points to 2.7 percent, in line with the preliminary national 2.6 percent. Low gas prices are likely driving the reduction.

Sentiment remains high in the Commonwealth

The Virginia Index of Consumer Sentiment (VAICS) is 86.0 in November, essentially unchanged since August 2014, the highest value recorded since the index began three years ago. The VAICS has maintained an upward trend started in early 2013 and interrupted only by a one period drop in November 2013. Sentiment in Virginia is lower than the preliminary national November value of 89.4, which is at its highest level since July 2007. Figure 1 illustrates sentiment values for Virginia and the U.S. over time.

Figure 1. Consumer sentiment over time, Virginia and the United States

U.S. data downloaded from FRED 11/17/2014; blue line is US Consumer Sentiment; black line is a two year moving average; orange bars are VA Consumer Sentiment

Figure two illustrates the three sentiment indexes for the Commonwealth and the nation. Virginians report being better off financially today than a year ago and that business conditions have strengthened. The Virginia Index of Current Conditions (VAICC) is 91.4, maintaining its strength since the last quarter. Thirty-five percent of respondents say their personal finances are better today compared to a year ago, up slightly since August. Additionally, close to half believe that it is a good time to buy large durable goods due to improved income and low product prices. Coupled with the lowest gas prices recorded in almost four years, this suggests a strong holiday spending season.   

The nation as a whole is more positive about the current conditions than the Commonwealth, and the gap is growing. The University of Michigan reported a preliminary November 2014 current conditions value of 103.0, up since August 2014. The Virginia-U.S. gap concerning current conditions has persisted since 2013, perhaps due to the labor market and budgetary effects of sequestration. The Governor's plan for "The New Virginia Economy" is aimed at alleviating these issues by diversifying the state economy.

The Virginia Index of Consumer Expectations (VAICE) is 82.5 in November, also essentially unchanged since August 2014. The preliminary November 2014 national measure of expectations is 80.6 indicating that Virginians are more optimistic about the future of the economy than the nation as a whole, but the gap is closing. Equal shares of respondents believe that in the next five years the overall economy will be prosperous (31.4%) and failing (31.7%), while 33.3 percent expect their household finances to improve in the coming year. Only 14 percent anticipate their personal finances to decline. Although the stock market has been volatile in recent months, record highs increase household wealth and low gas prices leave more money in consumers' pockets, resulting in a positive outlook.

Figure 2. Consumer Indexes November 2014, Virginia and United States

Strong sentiment in the Commonwealth is likely due to a variety of sources. Negative reports of international unrest and Ebola are balanced by positive reports of steady labor markets and low gas prices. However expectations remain tempered due to anticipated state tax increases and budget cuts stemming from the Commonwealth's projected $2.4 billion three year budget gap. In October, Governor Terry McAuliffe announced layoffs, largely in the prison system, sale of a police airplane, an increase in the markup on liquor, and budget cuts to address the shortfall. 

Rebound in Tidewater

The three index values are shown by region in Figure 3 and time series are shown in Figure 4. Tidewater rebounded significantly from the drop in sentiment in the third quarter of 2014. For all regions, sentiments are higher for current conditions than expectations of the coming year; expectations fell in all regions, except Tidewater, which is largely a correction for the third quarter slump.

Figure 3. Indexes across the Commonwealth, November 2014

Expectations dropped 15 points in the Shenandoah Valley driving the overall consumer sentiments down by 9 points. Initial unemployment insurance claims are down in all major MSA's in the region and unemployment rates are lower than the state or national values helping maintain optimism about current conditions. Pessimism about the future could be from concerns over the Atlantic Coast Pipeline or merely a consequence of small sample for the area.

Figure 4. Sentiment indexes by region, past two years

Short-term inflation expectations drop in the Commonwealth

The short-term inflation expectation, shown in Figure 5, is down six basis points to 2.7 percent, the lowest value since November 2012 and just one basis point higher than the national preliminary inflation expectation value. The long-term inflation expectation is relatively unchanged in Virginia. Coming in at 4.3 percent, it is well below the November 2013 value of 5.2 percent. The national long-term value is considerably lower than that of the Commonwealth, with a preliminary value of 2.6 percent. Low fuel prices likely play a role in the expected short-term disinflation. Both short- and long-term inflation expectations are fairly stable over time. Predictable prices are crucial to long-run investment, economic growth, and job creation.

Figure 5. Short- and long-term inflation expectations past two years, Virginia

Short- and long-run price expectations are weighted means. 

Methodology

Interviewing for The Roanoke College Poll was conducted by The Institute for Policy and Opinion Research at Roanoke College in Salem, Va., November 10-13, 2014. The sample consisted of 613 residents of Virginia. The sample of phone numbers was prepared by Survey Sampling Inc. of Fairfield, Conn. and was created so that all residential and cell phone numbers, including unlisted numbers, had a known chance of inclusion. Nearly 30 percent of respondents were contacted via cell phone.

Virginians are asked about their financial situation, general business conditions now and in the future, their inclination for purchasing durable goods, and their thoughts on prices in the near- and long-term. Indexes of current conditions, consumer expectations, consumer sentiment, and inflation expectations were constructed using methods similar to the popular national measures from the University of Michigan.

Questions answered by the entire sample of 613 consumers are subject to a sampling error of plus or minus approximately 4 points at the 95 percent level of confidence. This means that in 95 out of 100 samples, like the one used here, the results obtained should be no more than 4 points above or below the figure that would be obtained by interviewing all consumers who have a telephone. Where the results of subgroups are reported, the sampling error is higher. Sampling weights were constructed using Virginia Census 2010 data by age, race and gender groups.

A copy of the topline may be found here.

Contact: Dr. Alice Kassens

Phone: (540) 375-2428 (office)
Email: kassens@roanoke.edu