Consumer confidence rose in February to its highest point in three years as Americans feel more optimistic about their income prospects and the direction the economy is headed, a private research group reported Tuesday (Feb. 22).
The Conference Board says its Consumer Confidence Index climbed to 70.4 this month, up from a revised 64.8 in January, hitting its highest level since February 2008. It was the index’s fifth consecutive monthly increase, the Associated Press reported.
The figure topped economists’ expectations of a reading of 65, according to FactSet.
The strength of the stock market and falling unemployment are lifting Americans’ spirits in spite of rising gasoline and food prices and a still-weak housing sector. In addition, Americans started seeing more money in their paychecks in January after a cut to the Social Security tax, which could translate into stronger spending.
“Since November there has been a gradual improvement in the consumer mood, but it’s not happy days are here again,” says Chris Christopher, an economist with IHS Global Insight. “Household net worth is still about $10 trillion below its peak, and with what’s going on in the housing market now, it doesn’t look like that’s going to improve anytime soon.”
The S&P/Case-Shiller index of home values in 20 U.S. cities fell 2.4% last year, the group said Tuesday, and economists predict foreclosures will increase this year. The Conference Board found that the number of families who plan on buying a home in the next six months fell to 4.4% in February from 5.2% in January.
While consumer confidence is rising, continued troubles in the housing market and other lingering effects of the recession are keeping the index well below the 90-plus readings that signal a stable economy. Confidence fell off a cliff after the U.S. housing bubble burst and the financial crisis took hold in 2007.
The index dropped below 90 in January 2008 and hit an all-time low of 25.3 a year later. While confidence and spending have been inching back up as business conditions improve, Americans are still feeling cautious, especially when it comes to the job market.
Unemployment fell 0.4 percentage points in January after dropping the same amount in December, but the rate remains at 9%, a historically high level. That may be one reason consumers’ assessment of present-day business and employment conditions improved only moderately in February.
Those saying jobs are “plentiful” edged up to 4.9% from 4.6% in January, while those stating that business conditions are “good” rose to 12.4% from 11.3%. However, the number of respondents who said they expect more jobs to be created in the months ahead slipped to 19.8% from 20.8%.
While Americans’ assessment of current business conditions “remains rather weak,” the Consumer Confidence Index is at a three-year high “due to growing optimism about the short-term future,” says Lynn Franco, director of the Conference Board Consumer Research Center.
Consumers’ short-term outlook has improved since January. The share of respondents who expected business conditions to improve over the next six months increased to 24.4%from 24%, while the number who expected business conditions to worsen declined.
Holiday spending surged this year, but Americans still have their doubts about the economy.
With unemployment high and home prices falling in the nation’s largest cities, consumer confidence took an unexpected turn for the worse in December, the Associated Press reported.
The decline followed two months of rising optimism. Economists say the economic recovery is likely to be less fitful next year.
“The modest drop in the confidence index is not worrisome,” said Omair Sharif, economist at RBS Economics Research. “What matters to us — and to the economy — is that consumers are getting out there and spending. We’re looking at the best holiday season for retailers in five years.”
Busy malls in December are a big reason economists are less concerned about the latest consumer confidence figures. There’s also a slew of data that suggest next year will be brighter. Layoffs are slowing, businesses are investing money in computers and equipment, and the stock market has risen to its highest point in two years.
Still, consumers are not quite convinced.
The Conference Board, a private research group, said its Consumer Confidence Index fell to 52.5 in December, down from a revised 54.3 in the November survey. It takes a reading of 90 to indicate a healthy economy. The last time the index was that high was in December 2007, just as the recession began.
Among the 5,000 people surveyed this month, many expressed concerns about jobs. Fewer see them as “plentiful.” More described them as “hard to get.”
The unemployment rate rose to 9.8% in November, and only 39,000 net jobs were created that month.
Chris G. Christopher Jr., senior principal economist at IHS Global Insight, cautioned not to read too much into one report. A downward trend over several months would be more worrisome.
Same goes for the holiday sales data, which showed shoppers spending at the fastest pace since 2006. Key areas such as jewelry, home furnishings and consumer electronics are still below pre-recession levels. Many retailers offered discounts on holiday merchandise starting in late October and free shipping to lure buyers back.
Christopher will have a better sense of consumers’ mood when he sees how they spend after the holidays.
“There was a lot of unleashing of pent-up demand,” Christopher said. “Things are getting better, but there are still lot of negatives.”
The biggest may be the decline in home prices in the largest U.S. cities. Every city in the Standard & Poor’s/Case-Shiller 20-city home price index posted a decline from September to October. The last time that happened was in February 2009.
Prices are expected to keep falling through the middle of next year, as fewer people purchase homes and millions of foreclosed homes come on to the market.
This year is on pace to finish as the worst for home sales in more than a decade. High unemployment and tight credit have kept people from buying. And that’s despite some of the lowest mortgage rates in decades, which have recently begun to spike.
Many people are holding off on purchases because they fear the market has not hit bottom, analysts say.
Buyers aren’t just skittish in the hardest-hit cities, such as Las Vegas or Phoenix.
Home prices in Atlanta have fallen 6% in the last four months. That’s the worst decline among the 20 cities in that time, and it erases gains made in the spring, when the government offered home-buying tax credits.
Home prices in Dallas, Portland, Ore., Charlotte, N.C., Tampa, Fla., and Denver have fallen for four straight months.
Neither the dip in confidence nor the drop in housing prices caused economists to back down from their more optimistic outlook for 2011.
Stronger spending by consumers will help the economy grow faster in 2011. Some experts predict growth will clock in at around 4%, which would mark the fastest pace in 11 years and an improvement from the 2.8% pace projected for this year.
For economists, what’s most important is what consumers do, rather than how they feel.
“People are saying they are still worried,” said Joel Naroff, president of Naroff Economic Advisors. But those same consumers “have hit the malls pretty hard.”