USA economy: Consumer confidence hits high for the year

Event

Consumer confidence, on the Conference Board measure, hit a new high for the year in May, at 76.2.

Analysis

This marked the second month of improved sentiment, after a reading of 69 in April and 61.9 in March. Consumers’ forward-looking sentiment was particularly strong, with the expectations sub-index registering 82.4. Consumers were upbeat about both economic and labour market prospects, according to the Conference Board, which publishes the consumer confidence index. Consumers’ positive outlook is especially compelling in the context of the federal fiscal tightening since the beginning of the year, which so far seems to have had only a limited impact on household spending. This is reflected in retail sales and personal spending data as well. Even two to three months after automatic federal spending cuts took effect in March, consumer confidence remains buoyant, supported by sustained jobs creation.

One factor that is likely to be underpinning positive consumer sentiment is the continued dynamism in the housing market. House prices at both the national level and across the bulk of individual urban housing markets have been signalling a housing market revival for a year now. In March 2013 the Case-Shiller house price index (covering 20 major urban markets) showed house prices up by 10.9% year on year. Residential housing starts are still well below the peaks achieved pre-crisis, but construction activity is nonetheless expanding steadily. After almost seven years of weak construction rates, much of the overhang in the housing market has been absorbed. Meanwhile, continued population growth and household formation during the crisis are supporting demand for new housing during the recovery. The monetary stimulus by the Federal Reserve (the central bank), a bond-buying programme, has also served to make house purchases more affordable by helping to lower interest rates for mortgages.

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