Credit Commentary

Consumer Confidence exceeds expectations, other data mixed

By Zarana on Thursday, May 27 2010

The US reported positive consumer confidence data, and decline in house prices this morning. It seems Americans are feeling better about their job prospects, pushing consumer confidence higher in May. But signs that shoppers are slowing their spending as stocks fall could pose a roadblock on the path to recovery.

CONSUMER CONFIDENCE EXCEEDS FORECASTS

US Consumer Confidence in May rose to 63.3. Analysts expected a slight up-tick to 58.5 from April's 57.9 levels. This marks three months of straight increases on February's 10 point drop to 46.4. Although the report notes that these are still historically low levels, consumers were more optimistic on key measures: the proportion of consumers anticipating an increase in their incomes improved to 11.3% from 10.5%.

The Consumer Confidence released by the Conference Board captures the level of confidence that individuals have in economic activity. A high level of consumer confidence stimulates economic expansion while a low level drives to economic downturn. Generally, a high reading is also positive for the USD, while a low reading is negative.

According to the Conference Board, a reading above 90 reflects stable economic activity. Anything above 100 indicates strong growth. “The number is not a very strong reading,” said Lynn Franco, director of the Conference Board Consumer Research Center. “The added jobs only boost short-term expectations.”

Almost 300,000 jobs were added in April followed by a 230,000 gain in March, according to the U.S. Labor Department.

HOME PRICES REMAIN FLAT

The Fed's Housing Price index showed an increase of 0.3% in March as compared to February's decline of 0.2% and analyst expectations of no change. Although the monthly change was positive, the national purchase-only price index fell 3.1% YoY in Q1 2010 as the prices of other good rose 3.5% - meaning an inflation-adjusted 6.3% decline in house prices.

The Housing Price Index released by the Office of Federal Reserve Housing Enterprise Oversight provides an estimated value of housing market conditions. It is an important indicator as the housing market is considered as a sensitive factor to the US economy. Generally speaking, a high reading is seen as positive (or bullish) for the USD, while a low reading is seen as negative (or bearish).

Economists predict that confidence will be volatile in the future as oil continues to spill into the Gulf of Mexico with no solution on the horizon and uncertainty about European debt levels persists.

CONSUMER SPENDING

The strengthening of the labor market has coincided with a pickup in Americans’ purchases. Consumer spending increased 3.6% in the first quarter, the most since the same three months in 2007, Commerce Department figures showed April 30.

Target Corp., the second-largest U.S. discount retailer, posted first-quarter earnings on May 19 that beat analysts’ projections, helped by clothing sales. Net income rose 29% to $671 million from $522 million a year earlier. Shoppers are returning to stores as the economy rebounds.

 

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