Consumer confidence index rallied to a high of 70.3 in September; a level not seen since February. Consumers indicated that they are more upbeat about the job market and short-term business developments.
The survey, published by The Conference Board, shows an increase of the index by a full 9 points far surpassing expectations of 63.1. Consumer confidence is a vital indicator for U.S. economic activity, as more than two-thirds of the U.S. economy depends on consumption.
"Consumers were more positive in their assessment of current conditions, in particular the job market, and considerably more optimistic about the short-term outlook for business conditions, employment, and their financial situation. Despite continuing economic uncertainty, consumers are slightly more optimistic than they have been in several months," says Lynn Franco, director of economic indicators at The Conference Board.
Nonetheless, at least for the moment, it is not all smooth sailing and many respondents shifted their outlook to a better future. The present situation component of the index is still relatively low at 50.2, despite having increased from 46.5. The expectations index—looking six months ahead—rose to 83.7 from 71.1 however.
Within the Present Situations subcomponent, the situation improved when it came to the job market, but worries remain. Those saying that jobs are plentiful rose to 8.3 percent, up from 7.2 percent in August, a relatively low reading, but the trend is improving. The number of people saying that jobs are "hard to get" also improved slightly from 40.6 percent to 39.9 percent.
This assessment shifts when consumers look to the future, as 18.5 percent expect more jobs within the next six months and 16.3 expect a higher income. Another interesting observation is that households with a middle-class income of $35,000 to $49,999 posted a decline in the overall index from 61.8 to 56.1. The brackets of $0 to $34,999 and $50,000 and over posted an increase in confidence. The highest income bracket went up the most, rising from 76.4 to 87.4.
Analysts take the numbers with a pinch of salt: "While the rise in consumer confidence is encouraging, it will take further improvement in income and labor market trends to sustainably push confidence higher and large downside risks, especially the crisis in Europe and domestic fiscal policy, remain," writes Barclays in a note to clients.
Developments in financial markets often influence consumer sentiment, as households have a total of $76.1 trillion tied up in real estate, equities, and other assets, according to the latest Federal Reserve flow of funds report, which aggregates data from the second quarter. Real estate is the biggest category, totaling $19.1 trillion.
Improving Housing Market Important for Confidence
Given that a large chunk of consumers' net worth is tied up in real estate, rising housing prices are a welcome sign of improvement and can sway consumer confidence as well as spending.
Standard & Poor's released its Case-Shiller home price index Sept. 25, which shows that prices are improving, albeit from a low level. Average home prices for 20 cities across the nation increased 1.6 percent in July compared to June, as the index comes with a significant lag time.
David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices comments: "The news on home prices in this report confirm recent good news about housing. Single family housing starts are well ahead of last year's pace, existing home sales are up, the inventory of homes for sale is down, and foreclosure activity is slowing. All in all, we are more optimistic about housing. Upbeat trends continue. For the third time in a row, all 20 cities and both composites had monthly gains. Stronger housing numbers are a positive factor for other measures including consumer confidence."
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