Consumers Exuberant in U.S., and They May Not Be Irrational

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Low prices and borrowing costs are making American consumers more ebullient.

The University of Michigan’s final index of sentiment increased to 96.1 in June, exceeding all estimates in a Bloomberg survey of economists, from a 90.7 May reading. The gain capped the most optimistic first half of any year for households since 2004.

Consumers’ views of the buying climate from January through June were the brightest since 2007 as job and income growth and stock-market gains led to more upbeat assessments about finances. The figures point to a stronger push for the economy as shoppers embrace cheaper merchandise as well as low interest rates for bigger purchases.

“Consumers are in a fairly buoyant mood, and we see that being translated into spending activity,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities LLC in New York, whose projection for a 95.2 reading was among the closest in the Bloomberg survey. “We’re not only headed in the right direction, but we seem to be moving in that direction at an accelerated pace.”

The June sentiment index was the second-highest since January 2007, and the 5.4 point increase from May was the largest since December 2013. The median projection of economists polled called for the measure to hold at its preliminary reading of 94.6. Estimates in the Bloomberg survey of 59 economists for June ranged from 93 to 96.

Stocks were little changed, with equities posting a weekly decline, as a rally in Nike Inc. offset a sell-off in semiconductors. The Standard & Poor’s 500 Index fell less than 0.1 percent to 2,101.6 at the close in New York.

Improving Expectations

The survey’s final June index of expectations six months from now increased to 87.8 in June from 84.2, the biggest gain since January. The gauge of current conditions, which measures Americans’ views of their personal finances, rose to 108.9 from 100.8 last month. The 8.1 point advance was the biggest since the end of 2013.

The survey showed more Americans in the first half of the year viewed buying conditions as favorable, with attitudes about the purchase of durable goods such as automobiles the loftiest since 2007.

“The record levels of buying attitudes have been based on the appeal of low prices and low interest rates without any upward lift from the view that it was better to borrow in advance of expected interest-rate increases,” Richard Curtin, director of the Michigan Survey of Consumers, said in a statement.

Bloomberg Sentiment

The Michigan report corroborates the Bloomberg Consumer Comfort Index, which saw a turnaround in sentiment in the past two weeks after dropping almost 8 points from an eight-year high in mid-April. Attitudes about whether it was a good time to spend increased by the most since April 2013.

The prevalence of discounts and sales is making households more sanguine about the pricing environment. Americans expect an inflation rate of 2.7 percent in the next 12 months, down from 2.8 percent in May, the report showed. Over the next five to 10 years, they anticipate a 2.6 percent rate of inflation, matching the lowest since 2002.

Improved confidence and more employment opportunities explain why consumer spending is perking up. Purchases increased 0.9 percent in May, the biggest gain since August 2009, Commerce Department figures showed Thursday. Retail sales increased 1.2 percent last month following a 0.2 percent advance in April.

Second Half

“I remain very optimistic about consumer spending during the year ahead,” Curtin said on a Bloomberg conference call. He said he projects outlays to grow 3 percent this year, which means they will grow even faster than that in the second half of the year in order to meet his forecast.

Household spending in the first quarter was a little better than previously reported, making the slowdown in gross domestic product during the three months less daunting than originally estimated. GDP fell at a 0.2 percent annualized rate, revised from an earlier reading of a 0.7 percent drop, the Commerce Department said Wednesday.

More employment opportunities are bolstering spirits as well. Payrolls climbed in May by the most in five months, the latest Labor Department data show. Hourly pay increased 2.3 percent compared with May 2014, at the peak of the narrow range it’s tracked since the end of 2009.

In a press conference following the June 17 Federal Open Market Committee meeting, Fed Chair Janet Yellen said she still wants to see more “decisive” evidence of a lasting turnaround in the economy to justify an increase in the benchmark interest rate for the first time since 2006.

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