U.S. Consumer Sentiment Index Unexpectedly Rises to 74.3 in Michigan Index

U.S. consumers grew more confident in May than a month earlier as declining gasoline prices helped lift Americans’ spirits.

The Thomson Reuters/University of Michigan final index of consumer sentiment increased to a three-month high of 74.3 from 69.8 in April. Economists forecast a reading of 72.4, the same as the preliminary figure issued earlier this month, according to the median estimate in a Bloomberg News survey.

Gasoline prices have begun to retreat after rising to the highest level since July 2008, providing some relief for consumers whose purchases account for about 70 percent of the economy. Bigger gains in employment may help boost spending that slowed in the first quarter.

“Income generation has been soft, and a good portion of income was being gobbled up by inflation,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. “For the summer months, prices might come down and give consumers a little more wiggle room.”

Consumer spending climbed less than forecast in April as food and fuel costs increased, a Commerce Department report showed today. Purchases rose 0.4 percent after a 0.5 percent gain the prior month that was smaller than previously estimated. Economists projected a 0.5 percent rise in April spending, according to the median forecast in a Bloomberg survey.

Housing Struggling

A struggling housing market may be limiting confidence. The National Association of Realtors said today that the number Americans signing contracts to purchase previously owned homes plunged in April.

The group’s index of pending home resales declined 12 percent after a revised 3.5 percent gain the prior month. The median projection in a Bloomberg survey called for a 1 percent drop.

Stocks held earlier gains after the reports, with the Standard & Poor’s 500 Index rising 0.4 percent to 1,330.47 at 10:38 a.m. in New York. Treasuries were little changed with the benchmark 10-year note yielding 3.06 percent.

Confidence forecasts in the Bloomberg survey of 64 economists ranged from 70 to 74. The index averaged 89 in the five years leading up to the recession that began in December 2007.

Today’s sentiment report parallels other gauges. The Bloomberg Consumer Comfort Index rose to minus 48.1 in the week to May 22, ending a monthlong slide. The Conference Board’s confidence index increased in May, economists in a Bloomberg survey project ahead of the May 31 release.

Current Conditions

The Michigan survey’s current conditions gauge, which reflects Americans’ perceptions of their financial situation and whether they consider it a good time to buy big-ticket items like cars, decreased to 81.9 from 82.5 the prior month.

Consumer expectations for six months from now, which more closely projects the direction of consumer spending, rose to 69.5, the highest since February, from 61.6, today’s confidence report showed.

Today’s confidence survey showed consumers said they expect an inflation rate of 4.1 percent over the next 12 months, compared with a rate of 4.6 percent projected in April. Over the next five years, the period tracked by Federal Reserve policy makers, Americans’ expectations for inflation held at 2.9 percent.

Employers added workers for a seventh consecutive month in April. Payrolls expanded by 244,000, the biggest gain since May 2010, while the jobless rate rose to 9 percent, the Labor Department said May 6.

Gasoline Prices

Meantime, gasoline prices surged to $3.99 per gallon nationally on May 4. Fuel costs have since moderated, dropping to $3.81 a gallon on May 26, according to AAA, the nation’s biggest motoring organization.

“The biggest concerns that I have on an ongoing basis are anything that impacts the consumer’s ability to buy discretionary items: gas, jobs,” said Ken Hicks, chief executive officer of Foot Locker Inc. (FL), the largest U.S. athletic shoe store chain. “As those stay up, that is a challenge.”

The two-year extension of Bush-era tax cuts President Barack Obama signed into law in December has helped consumers cope with higher food and energy costs, Hicks said during a May 20 conference call with analysts.

New York-based Footlocker, which reported first-quarter revenue of $1.45 billion that beat the average analyst estimate, raised its forecast for sales in the final three quarters of 2011 at stores open more than year.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz cwellisz@bloomberg.net

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