Consumer confidence jumped to a three-year high in February, reflecting a growing optimism about the short-term future and marked income prospects.
The Conference Board Consumer Confidence Index rose to 70.4 (on a 100 point scale) up from 64.8 in January, exceeding analysts’ expectations of 66. While the reading is better than expected and the fifth consecutive monthly increase, it is still far below the 90 or above index reading that signals a healthy economy, a metric not reached since 2007.
“This should be the year that confidence returns to normal, rather than recessionary levels,” said Scott Hoyt, economist with Moody’s Analytics. “Accelerating job gains will be the primary catalyst, although the broad strength in the economy will provide other supports as well.”
The index suggests falling unemployment and a boost to disposable income from the payroll tax cut are offsetting the effects of high gas and low house prices, said Paul Dales, an economist with Capital Economics.
One component of the index is consumers’ assessment of present-day conditions. Those stating business conditions are “good” increased to 12.4 percent from 11.3 percent, while those claiming business conditions are “bad” was unchanged at 39.6 percent. “Looking ahead, consumers are more positive about the economy and their income prospects, but feel somewhat mixed about employment conditions,” said Lynn Franco, director of the Conference Board Consumer Research Center.
An indicator of consumers’ expectations drove February’s gain, rising to 95.1 up from 87.3 in January, its highest level since December 2006. Income expectations also improved. The proportion of consumers expecting an increase in their incomes rose to 17.3 percent from 15.3 percent.
Consumers’ appraisal about the job market was mixed. Those expecting more jobs in the months ahead edged down to 19.8 percent from 20.8 percent, however, those anticipating fewer jobs decreased to 15.4 percent from 21.2 percent. At the same time, the unemployment rate has remained at 9 percent or higher for nearly two years.
Although the small businesses hiring trend is moving in the right direction, it’s extremely slow, said Denny Dennis, senior researcher with the National Federation of Independent Business. “It was clearly good news,” Dennis said. “You just hope that it will translate into our sector a bit more. We are clearly not quite where some other portions of the economy are. Poor sales remain the number one issue.”
Consumers’ short-term outlook was more optimistic than in January. Those expecting business conditions to improve over the next six months increased to 24.4 percent from 24.0 percent, while those anticipating business conditions will worsen declined to 10.4 percent from 12.2 percent.
Consumer confidence is an important economic indicator because it helps determine spending, which accounts for 70 percent of U.S. economic growth. Changes in buying plans were mixed. More consumers plan to buy cars, but fewer plan to purchase homes or appliances compared to January, Hoyt said.
The National Retail Federation expects a 4 percent increase in retail sales for 2011. Robust holiday spending helped pave the way for strong economic growth this year, the trade organization said.
Meanwhile, the Case-Shiller Home Price Index, which measures U.S. home prices, declined by 3.9 percent in the fourth quarter. The Index is down 4.1 percent from the same time a year ago, and annual growth decelerated in 18 of the 20 major metro areas. Despite improvements in the overall economy, housing continues to drift lower and weaker,” said David Blitzer, chairman of the Index Committee at Standard & Poor's. It will take until late 2011 for house prices to stabilize, according to the Case-Shiller home price index.
“The fact that prices were still falling eight months after the tax credit expired suggests that prices are now being depressed by the continued imbalance between low demand and high supply,” Dales said. He expects home prices to fall by another 5 percent this year. The continued fall in home prices has taken prices to a new cycle low, meaning a double-dip is underway, he said.
The Indices come hours before President Obama is expected to hold a small business summit in Cleveland, Ohio to meet with entrepreneurs and find ways the business community can help spur the economic recovery.
Consumer Confidence Jumps in February Economic Report (Market Watch)
Consumer Confidence Index Surges to Three-Year High (CNN Money)
U.S. Consumer Confidence Rose in February to Three-Year High (Bloomberg)