July 27 (Bloomberg) -- U.S. consumer confidence rose this month to a two-year high, boosted by an improving job market that also is helping keep new-home sales close to a record.

The Conference Board's confidence index increased to 106.1 in July from a revised 102.8 in June. Single-family home sales sold at a 1.326 million annual rate last month, a smaller-than-expected 0.8 percent decline from May's record, the Commerce Department said in Washington.

``U.S. households are displaying tremendous confidence in future economic conditions by their willingness to enter into the housing market,'' said John Ryding, chief U.S. economist at Bear Stearns & Co. in New York.

The creation of 1.3 million jobs so far this election year is starting to lift optimism that lagged as gasoline prices rose as much as 35 percent and higher food and health-care costs helped pushed consumer prices up 3.3 percent from June 2003. The Conference Board said the percentage of Americans who consider jobs hard to find is now the lowest since October 2000.

The improved outlook is helping sustain demand for housing as interest rates rise, with combined new and existing homes setting a third straight record in June. The median selling price of new homes increased 1.7 percent to $209,900 in June from a month earlier, the Commerce Department said.

``Rising home prices are another reason why consumers feel so confident,'' said Joseph LaVorgna, chief U.S. fixed-income economist at Deutsche Bank Securities LLC in New York.

Market Reaction

The New York-based Conference Board's index was expected to rise to 102, the median forecast of 63 economists in a Bloomberg News survey, from 101.9. Estimates ranged from 98 to 107. The Conference Board surveys 5,000 households about general economic conditions, employment prospects and spending plans. Economists expected new-home sales to fall to a 1.272 million annual rate from a previously reported 1.369 million pace a month earlier.

U.S. Treasury notes dropped, pushing the yield on the 10-year note to the highest since July 2, after the bigger-than-forecast gain in consumer confidence added to speculation the Federal Reserve will boost its benchmark interest rate four more times this year. The 4 3/4 percent Treasury note maturing in May 2014 fell 21/32 point, pushing its yield up 0.08 percentage point to 4.57 percent at 1:04 p.m.

Shares of construction companies including Pulte Homes Inc., the largest U.S. homebuilder by market value, helped buoy U.S. stocks. The Standard & Poor's 500 Stock Index rose 5.6 points, or 0.5 percent. Pulte shares rose as much as 5.6 percent to $53.10 after the company said second-quarter profit rose 54 percent.

Consumer Confidence

``The economy is in solid shape,'' said John Faraci, chief executive officer of International Paper Co., North America's biggest paper maker, on a conference call yesterday. ``When we saw GDP growth last year, we didn't see it from our customers. This time we are seeing it even with interest rates rising.''

This month's headline reading for consumer confidence was the highest since June 2002. The index component that tracks consumer expectations for the next six months jumped to 105.8, the highest since December, from 100.8 in June. A gauge of optimism about the present situation rose to 106.5 this month, the highest since May 2002, from 105.9.

Fed Chairman Alan Greenspan and other U.S. central bank officials last week said the economy would most likely shake off ``softness'' from June and resume a robust expansion. The percentage of consumers that see business conditions in the current month as ``good'' was little changed, falling to 25.6 from 25.8 in June, the Conference Board said.

Gross domestic product has risen every quarter since the last three months of 2001 and may have grown 3.7 percent from April through June, according to a Bloomberg News survey of economists.

Good News for Bush

The Fed last month raised its benchmark interest rate a quarter percentage point to 1.25 percent to help stem a faster rise in inflation and is expected to boost it another quarter point when its policy making Open Market Committee meets again on Aug. 10, based on the median economist forecast.

The economy has been a major issue in the presidential campaign, as Democrats criticize President George W. Bush for a net loss of 1.1 million jobs during his term. Challenger John Kerry, a four-term Massachusetts senator, has called many of the 1.3 million jobs added this year ``second-rate,'' saying that they don't pay as well as those that have been lost.

Greenspan told Congress on July 21 that the Fed has ``been able to find a significantly meaningful change'' in job quality.

This month's jump in confidence is good news for the president, said Delos Smith, a Conference Board economist. ``When Bush's father ran for re-election in 1992 his numbers were in the 50s,'' Smith said. ``Anytime the numbers are over 100 it's very good for an incumbent.''

`Solid Shape'

The U.S. may have created an additional 233,000 jobs this month, according to preliminary estimates in a Bloomberg News survey. In addition, U.S. gasoline prices have decreased, helping consumers feel they have more money to spend.

``The economy is in solid shape,'' said John Faraci, chief executive officer of International Paper Co., North America's biggest paper maker, on a conference call yesterday. ``When we saw GDP growth last year, we didn't see it from our customers. This time we are seeing it even with interest rates rising.''

The increase in hiring this year is beginning to register with consumers, as the percentage of people reporting jobs are ``plentiful'' rose to 19.8, the highest since 20.1 in June 2002. The percentage that expects fewer jobs six months from now fell to 13.1, the lowest in almost four years.

There isn't a clear correlation between consumer sentiment and spending, according to studies by Federal Reserve and private economists. Still, job and income growth may be helping to keep home sales strong.

Spending on Homes

The percentage of people who said they plan to buy a new home over the next six months rose to 4 from 3.6, the Conference Board survey found. Sales of previously owned homes rose to a record 6.95 million annual pace in June, the National Association of Realtors said yesterday.

Today's Commerce Department report showed single-family home sales dropped 0.8 percent in June from a record 1.337 annual pace in May. The monthly average rate on a 30-year fixed mortgage rose in June to the highest in almost two years as the Fed starting raising the national benchmark rate.

``The upward turn in interest rates is dragging `fence- sitters' into the housing market,'' economist Ryding said.

New home sales account for 15 percent of the market and are considered a harbinger of the resale market for previously owned homes. Residential investment, which includes construction of homes, improvements and brokers' sales commissions, increased at a 4.6 percent annual rate in the first quarter after a 7.9 percent pace in the prior three months, according to the latest Commerce Department gross domestic product report.

Gasoline Prices

Gasoline prices held above $2 a gallon on average in May and June, with regular unleaded rising 35 percent from the beginning of the year to $2.10 a gallon in mid-May. Prices have since dipped, which may help increase households' disposable income and push up consumer spending the rest of the year.

``The economy is a little bit better than it was a couple years ago,'' Howard Bernick, chief executive of Alberto-Culver Co., said in an interview.

Alberto-Culver, which makes beauty products such as St. Ives skin lotion and Alberto V05, said sales of its more expensive items like Tresseme shampoos and conditioners have grown. The company, based in Melrose Park, Illinois, had a record $823 million in fiscal third-quarter sales.

Last Updated: July 27, 2004 13:05 EDT