March 1 (Bloomberg) -- Confidence among American households rose more than projected in February in a gain that could boost consumer buying, the largest part of the economy.
The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 77.6 from 73.8 in January. The gauge was projected to match the preliminary reading of 76.3, according to the median estimate of 58 economists surveyed by Bloomberg.
Consumers are contending with an increase in payroll taxes and concerns that federal spending cuts starting today may hold back economic expansion. Still, payrolls added 157,000 jobs in January and initial jobless claims fell more than projected last week, Labor Department figures showed. The job gains combined with rising property values may be enough to bolster Americans’ faith in the economy and promote consumption.
“The fact that confidence is picking up will make consumers feel more confident about drawing down savings to spend,” said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch in New York. “The challenge that consumers face is that take-home pay has been considerably reduced as the result of higher taxes, and with lower income, spending will likely struggle.”
The Standard & Poor’s 500 Index fell 0.4 percent to 1,508.78 at 10:26 a.m., after the confidence report was released. The yield on the benchmark Treasury note fell to 1.86 percent from 1.88 percent late yesterday.
Estimates for the confidence measure ranged from 74 to 78, according to the Bloomberg survey. The index averaged 64.2 during the recession ended in June 2009, and 89 in the five years prior to the 18-month slump.
The Michigan survey’s current condition index, which measures whether Americans think it’s a good time to make big investments and gauges consumers’ view of their personal finances, rose to 89 in February from 85 in the prior month. The preliminary reading was 88 for February.
The index of expectations six months from now, which more closely projects the direction of consumer spending, rose to 70.2 in February from 66.6 the month before. The preliminary reading was 68.7 for February.
Consumers in today’s confidence report said they expect an inflation rate of 3.3 percent over the next 12 months, the same as in January. Over the next five years, Americans expected a 3 percent rate of inflation, up from January’s 2.9 percent.
The Conference Board’s index of confidence among U.S. consumers climbed to 69.6 in February, beating all estimates in a Bloomberg survey, after a revised 58.4 in January.
Changes in confidence could affect how much consumers spend on items such as cars and houses going forward. Household spending in the U.S. rose 0.2 percent in January, a Commerce Department report showed today, even as incomes dropped 3.6 percent, the most in 20 years.
The U.S. job market is improving, which could provide a boon to American buyers. Jobless claims decreased by 22,000 to 344,000 in the holiday-shortened week that ended Feb. 23, the Labor Department reported in Washington. The median estimate of 44 economists surveyed by Bloomberg projected 360,000 applications.
Consumers have also benefited from historically low interest rates, which have helped U.S. auto sales to jump to near pre-recession levels. U.S. light-vehicle sales probably climbed 3.7 percent in February to 1.19 million, based on the average estimate of 10 analysts in a Bloomberg survey.
The housing market is on the mend, and appreciating property values may give consumers a boost that will allow them to spend on goods and leisure activities, such as gambling.
”I do see several meaningful encouraging signs of more rapid economic growth ahead in this country in 2014,” said Gary W. Loveman, chief executive officer of Caesars Entertainment Co., in a Feb. 25 fourth quarter earnings call. The Las Vegas-based company is the largest owner of U.S. casinos.
”Whether and when these improvements turn into more prosperous gaming markets, of course, remain to be seen. But it’s good to some signals of a more robust recovery ahead of us.”
Sentiment could be suffering, however, after Congress allowed the tax that funds Social Security to revert to 6.2 percent from 4.2 percent starting in January. That puts the levy at its 2010 level and will cost someone who earns $50,000 annually an extra $83 a month.
Gasoline prices are also on the rise, taking money out of consumer’s pockets. The price of a gallon of regular gasoline at the pump averaged $3.78 on Feb. 27 compared with $3.35 a month earlier, according to data from AAA, the largest U.S. motoring group.
At Target Corp., the second-largest U.S. discount chain, stubbornly high jobless rates and the onset of the extra payroll levy have caused concern.
“The U.S. economy is growing at a painfully slow rate and unemployment remains persistently high,” Gregg W. Steinhafel Target’s chief executive officer, said during a Feb. 27 fourth-quarter earnings call. “While there are some encouraging signs in the housing market, volatility and consumer confidence, a payroll tax increase and rise in the price of gas all present incremental headwinds.”
Though a newly enhanced program to match competitors’ prices, which now includes online retailers such as Amazon.com Inc., and a focus on value will help the company succeed in the uncertain environment, Steinhafel said, the conditions could be an economic drag.
“Given these new challenges facing an already sluggish economy, we have a tempered view of the near-term sales environment,” he said.
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