Consumer sentiment climbed last week to the highest level in more than five years and claims for jobless benefits unexpectedly dropped, indicating the U.S. economic expansion is making progress.
The Bloomberg Consumer Comfort Index improved to minus 28.9 in the week ended April 28 from minus 29.9, a report showed today. The number of applications for unemployment insurance payments fell by 18,000 to 324,000 in the week ended April 27, according to Labor Department figures in Washington. The confidence reading was the highest and claims were the lowest since January 2008, a month after the last recession began.
The gain in sentiment is being driven by high-income earners as rising home and stock values bolster household wealth. While those at the other end of the pay scale are being helped by easing fuel costs and fewer job dismissals, a boost in the payroll tax that took effect in January is curbing total household purchases and economic growth this quarter.
Employers “don’t see this slowdown as deep or persistent enough to justify firing,” said Dean Maki, chief U.S. economist for Barclays Plc in New York. “Consumers may not feel worse, but they simply have less money to spend. In this case, the loss of income from the tax increases is going to dominate in the second quarter.”
Stocks rose, sending the Standard & Poor’s 500 Index to a record high, after U.S. jobless claims fell and the European Central Bank cut its key interest rate to a record low. The S&P 500 advanced 0.9 percent to 1,597.59 at the close in New York.
Elsewhere, Europe’s economy is showing little sign of picking up. Euro-area manufacturing output contracted in April for a 21st straight month, figures from London-based Markit Economics showed today.
The ECB responded to the weakness by cutting its key interest rate to 0.5 percent from 0.75 percent after policy makers met today in Bratislava.
In a news conference, ECB President Mario Draghi opened a new front in the battle against the debt crisis by signaling officials may take the unprecedented step of charging banks to park excess cash with the central bank overnight and that another reduction in the main rate is possible.
A report from the U.S. Commerce Department today highlighted the slowdown in global growth. The nation’s trade deficit narrowed to its second-lowest level in three years as the biggest drop in imports since February 2009 swamped a decline in exports. The gap shrank 11 percent in March to $38.8 billion from a revised $43.6 billion in February.
Household confidence improved last week as Americans felt the most upbeat about spending since before the recession began, today’s comfort index showed. The buying-climate gauge rose to minus 32.5, the best reading since November 2007, a month before the worst economic slump since the Great Depression started.
Rising stock and home prices may be the cause. The S&P 500 Index (SPX)’s previous record close was at 1,597.57 on April 30, and the S&P/Case-Shiller index of property values in 20 cities rose 9.3 percent in February from the same month in 2012, the biggest year-to-year advance since May 2006, the group reported this week.
High-income earners were feeling better as a result. Comfort among those earning $100,000 or more annually gained 8 points to 19.7, its highest level since 2010, and second-best since November 2007.
Confidence for those earning more than $50,000 was positive for the first time since November 2007, with their gauge rising to 0.4.
Other groups making headway include homeowners, whose confidence last week was at its best level since January 2008, climbing to minus 21.5, up 10.8 points from its low this year, today’s report showed.
The same cannot be said of Americans at the lower end of the income scale. The comfort index for those making less than $15,000 a year dropped to minus 64.2 last week, hovering near a three-month low. Fiscal policy changes may be restraining confidence and consumers’ ability to spend.
Further job-market gains may also be needed to boost confidence. A Labor Department report tomorrow may show that payrolls climbed by 145,000 workers in April, according to the median estimate in Bloomberg Survey, following an 88,000 gain in March that was the smallest in nine months. Employment rose 220,500 a month on average in the four months through February. Unemployment is projected to hold at a four-year low of 7.6 percent.
The world’s largest economy shows signs of slowing as cuts to planned federal spending that took effect in March are divvied up. In addition, a higher payroll tax that took effect in January could have a lagged effect on spending. The tax reverted to its 2010 rate of 6.2 percent after holding at 4.2 percent for two years, costing households that earn $50,000 a year about $80 per month.
Consumer purchases advanced 0.2 percent in March, ending the first quarter on a weak note, figures from the Commerce Department showed this week. The gain was paced by a surge in outlays for utilities and other services as temperatures were unusually cold.
The auto market, which has been leading the spending gains, shows signs of leveling off. Cars and light trucks sold at 14.9 million annual rate in April, the lowest level since October, industry data showed yesterday. Purchases averaged a 15.3 million rate in the first quarter, the most since the same period in 2008, according to data from Ward’s Automotive Group.
General Motors Co. (GM) is among companies benefiting from growing confidence as their sales climbed in April from the same month last year.
“Just as you can correlate stronger pickup sales to the housing recovery, crossover sales closely track confidence at the family level,” Kurt McNeil, vice president for U.S. sales and service, said on a May 1 conference call. The company reported a 14 percent increase in crossover sales, plus a 17 percent increase in pickup, van and sport-utility vehicle purchases and a 6 percent gain in cars from the same month last year, based on a company press release.
The drop in jobless claims reported by the Labor Department today shows companies are confident their staff levels can adequately meet current demand. Even so, without a pickup in economic growth, the same companies may be reluctant to hire more workers in coming months.
Economists forecast the number of claims last week would rise to 345,000, according to the median estimate in a Bloomberg survey. Projections ranged from 335,000 to 365,000 in the Bloomberg survey of 48 economists.
“Employers are not necessarily shedding workers, but they are not necessarily enthusiastic about adding to payrolls either,” said Tom Simons, an economist at Jefferies LLC in New York, who projected claims would drop to 335,000. “It’s because of the low level of growth in the economy, and some caution about the future of fiscal policy.”
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