Consumer confidence in U.S. rises to highest since February 2008

Regaining Traction

“Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll-tax hike, and sequester,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.

Today’s figures are in line with other measures of sentiment. The Bloomberg Consumer Comfort Index in the week ended May 19 was close to its highest level since January 2008. The Thomson Reuters/University of Michigan index of preliminary consumer sentiment reading for May posted its strongest reading since July 2007.

Further gains in confidence may help bolster consumer spending after a projected slowdown this quarter. Household purchases are forecast to increase at a 2.1% annualized pace in the third quarter and a 2.5% rate in the final three months of the year, according to a Bloomberg survey of economists from May 3 to May 8.

Spending the in the first quarter increased at a 3.2% annualized rate, the biggest gain since the end of 2010, Commerce Department figures showed April 26. The rise added 2.24 percentage points to economic growth of 2.5%.

Employment Figures

An improving labor market, combined with stronger income gains, is needed to fuel bigger gains in spending. A Labor Department report last week showed First time jobless claims fell by 23,000 to 340,000 for the period ended May 18. The unemployment rate was 7.5% in April, a four-year low, and the economy added 165,000 jobs.

Americans’ balance sheets are on the mend as the values of their homes and stock portfolios increase. Another report today showed home prices in 20 U.S. cities rose more than forecast in March. The S&P/Case-Shiller index of property values climbed 10.9% in the year ended in March, the biggest 12-month gain since April 2006.

Stocks are close to all-time highs. The Standard & Poor’s 500 Index has increased 23.8% this year through last week.

Kirkland’s Inc., a Nashville, Tennessee-based retailer of home accessories and gifts, sees signs of strength in spending.

Housing Effect

“Recent pockets of improvement in the housing market suggest a lift to consumer confidence and activity,” Robert E. Alderson, president and chief executive officer of Kirkland’s, said May 23 on an earnings conference call. He said that was true “especially for middle-income consumers where housing has traditionally been a risk order of wealth similar to the equity and bond markets for the more affluent.”

At the same time, some households may be held back by the 2 percentage-point increase in the tax that funds Social Security, which took effect at the start of the year after Congress allowed a tax cut to expire. Americans earning $50,000 a year are taking home about $80 less a month.

Workers spent an average of 36% of the additional funds from the tax cut, based on survey data reported by a New York Federal Reserve working paper.

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