Consumer confidence unexpectedly climbed in March to the highest level in six years, propelled by improved optimism about the economy’s prospects, signaling growth will strengthen after a weather-related slowdown.
The Conference Board’s sentiment index rose to 82.3, the highest since January 2008 and exceeding all forecasts in a Bloomberg survey of economists, from 78.3 in February, the New York-based private research group said today. Other figures showed the housing market was having trouble gaining traction, in part because of harsh winter weather earlier this year.
“Signs of spring might be evident and might be getting people a little more optimistic that the future is going to be better,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. As “these weather effects dissipate and we get payback, you’ll see confidence improve even more.”
More Americans this month held out hope that employment opportunities will improve as the world’s largest economy gains momentum, which boosts the odds that spending will pick up. That would help companies such as General Mills Inc. (GIS) recover after the frigid winter hurt sales at the start of the year.
“Consumers spend based on their expectations and not based on their current levels of income, and consumer expectations were at a very healthy level this month,” said Guy LeBas, managing director of fixed income strategy at Janney Montgomery Scott LLC in Philadelphia.
Stocks rose for the first time in three days, with the Standard & Poor’s 500 Index climbing 0.3 percent to 1,862.74 at 12:53 p.m. in New York.
Sentiment elsewhere wasn’t as buoyant. German business confidence fell in March for the first time in five months as companies assess the risks to trade from escalating European Union sanctions against Russia. The Ifo institute’s business climate index, based on a survey of 7,000 executives, fell to 110.7 after reaching 111.3 the prior month, the highest level since July 2011.
Snowstorms and colder temperatures in the first two months of the year coupled with higher mortgage rates, more expensive properties and a lack of supply restrained the U.S. housing market. Sales of new homes dropped 3.3 percent to a 440,000 annualized pace in February, the weakest in five months, the Commerce Department said today.
Another report from S&P/Case-Shiller showed home values in 20 cities advanced in the year to January at the slowest pace since August. Prices climbed 13.2 percent from January 2013 after rising 13.4 percent in the 12 months ended in December.
An acceleration in prices since the end of 2012 has generated more profit for companies such as Lennar Corp. (LEN) and KB Home. (KBH) Miami-based Lennar, the biggest homebuilder by market value, reported net income rose to $78.1 million in the three months through February from $57.5 million a year earlier, the company reported March 20.
“In the first quarter, we have seen clear signs that volume is returning to the market even as severe weather made conditions difficult,” Stuart Miller, Lennar’s chief executive officer, said on a conference call. “We continue to believe that the fundamental drivers of improvement in the housing market remain a steadily improving economy with a slowly improving employment picture unlocking pent-up demand, while supplies remain constrained to meet that demand.”
Los Angeles-based KB Home also reported fiscal first-quarter earnings that beat estimates as it raised prices and opened communities in high-cost, land-constrained markets, such as parts of California.
The median forecast in a Bloomberg survey of 76 economists called for the consumer confidence reading to rise to 78.5 from a previously reported 78.1 in February. Estimates ranged from 75 to 80.
The Conference Board’s measure of consumer expectations for the next six months rose to 83.5 in March, the highest since September, from 76.5 a month before. Some 18.1 percent of respondents were more optimistic about business conditions, up from 17.3 percent a month earlier.
An increasing share of Americans said they expected jobs to become more available in the next six months. At the same time, fewer anticipated their incomes would accelerate.
“While consumers were moderately upbeat about future job prospects and the overall economy, they were less optimistic about income growth,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement. “Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead.”
Fading weather effects and an improving economy are boosting the consumer outlook at companies including General Mills, the Minneapolis-based maker of Cheerios cereal.
“We’re coming off a very severe winter,” and “we’re already seeing our categories strengthen a little bit as we get through that,” General Mills Chief Executive Officer Kendall Powell said in a March 19 call. “And as we’ve said in the past, while the economy is improving slowly and incomes are strengthening slowly, they are improving. And we think that as incomes continue to grow and consumers gain confidence that will be a positive sign for our category.”
Today’s consumer confidence data stand in contrast to other recent reports. The Thomson Reuters/University of Michigan preliminary sentiment index unexpectedly dropped to a four-month low in March. The Bloomberg Consumer Comfort (COMFCOMF) Index showed Americans were the most pessimistic on the economic outlook than at any time in four months.
The Conference Board’s present conditions measure fell for the first time in five months, to 80.4 this month from an almost six-year high of 81 in February. Consumers were less upbeat about the current labor market.
The labor market in February began to rebound from weather-related setbacks as employers added a better-than-expected 175,000 workers to payrolls after a 129,000 increase the prior month, according to data from the Labor Department.
Signs the economy is making progress after the slowdown early in the first quarter help explain why Federal Reserve policy makers last week reduced monthly asset purchases by another $10 billion beginning in April.
As Fed officials gauge the economy, they’re also monitoring the effects their policies may have on interest rates. Treasury yields jumped March 19 after Janet Yellen said in her first press conference as Fed chair that rates could rise “around six months” after asset purchases end, most likely in the fall.
Policy makers also said that the recovery in housing is still slow. That may give way to a pickup as more people take advantage of borrowing costs that, while higher than a year ago, are historically low.
“There’s a lot of demographic potential there for new household formation that would ultimately generate new construction,” Yellen said after the Fed’s policy meeting. “And the level of rates I think does matter, and the fact that they’re low now is something that should serve as a stimulus to people coming back into the housing market.”
To contact the reporter on this story: Katherine Peralta in Washington at firstname.lastname@example.org