Credit Commentary

Consumer Confidence beat forecasts

By Zarana on Wednesday, August 26 2009

Americans' pessimism about the economy appears to be lifting, with consumer expectations for the next six months hitting their most positive point since the recession began. But economists warned that consumer confidence remains far below levels associated with a healthy economy and might not lead to the increased spending critical for a broad recovery.

The improvement stems partly from the housing market. A national gauge of home prices in the nation's 20-largest cities on Tuesday posted its first quarterly increase in three years, even though another report showed home values still dropping in most states.

The Conference Board confidence index rose to 54.1 in August, the first gain since May, consumers became less concerned about the outlook for jobs.  While, the S&P/Case-Shiller home-price index advanced 2.9% in the second quarter from the previous three months, the first increase since 2006 and the biggest in almost four years.

Economists closely monitor confidence because consumer spending accounts for about 70% of U.S. economic activity. Consumer sentiment, fueled by signs the economy is stabilizing, has recovered since hitting a record low of 25.3 in February. A reading of 90 indicates the economy is on solid footing; anything above 100 signals strong growth.

In addition, Consumers' expectations for the economy over the next six months rose to 73.5 in August from 63.4 in July, the highest level since December 2007, when the recession began.

The housing sector received a mixed batch of news. The Federal Housing Finance Agency reported that home values fell in 46 states (including Utah), while the Standard & Poor's/Case-Shiller's U.S. National Home Price Index of larger metro areas climbed up. Home prices in the biggest cities, though still down nearly 15% from last year, are at levels last seen in early 2003.

Economy Forecast

The White House Office of Management and Budget today forecast the economy will grow 2 percent in 2010, less than the 3.2 percent expected in May, and the contraction this year will be more than twice as deep as previously anticipated. Unemployment will surge to 10 percent this year and the budget deficit will be $1.5 trillion next year, both higher than the prior estimates, according to the mid-year review.

Exceeds Forecast

Consumer confidence was projected to rise to 47.9, according to the median estimate in a Bloomberg News survey of 67 economists. Forecasts ranged from 42 to 51. The index averaged 57.95 last year. The Conference Board revised the July reading up to 47.4 from a previously reported 46.6.

Consumers this quarter have benefited from government efforts such as the “cash-for-clunkers” plan and extended jobless benefits aimed at buttressing spending, which accounts for 70 percent of the economy.

Employment outlook

The employment outlook also turned more upbeat. The percentage of consumers expecting more jobs in the months ahead increased to 18.4% from 15.5% while those expecting fewer jobs fell to 23.3% in August from 26.1% in July.

Consumers were more optimistic about the current employment situation. The survey participants who think jobs are "plentiful" rose to 4.2% in August, from 3.7% in July. The percentage of total respondents who think jobs are "hard to get" slipped to 45.1% from 48.5%.

Earlier this month the Labor Department reported that 247,000 jobs were lost in July and the unemployment rate fell to 9.4% from 9.5% in June, the first decline in more than a year.