Behind Consumers' Growing Confidence

With gas prices down and the job market up, consumers are feeling better about the economy

For Nancy Lidel, a mother of four boys in Ann Arbor, Mich., the deal for a 42-inch flat-panel, high-definition Magnavox TV for less than $1,000 was just too good to pass up. She purchased one, and now she can't imagine how life was before high definition. "The best part is that my four boys don't complain about not going to the theater anymore," says Lidel. "After all, it costs over $50 if the whole family were to see a movie."

Lidel is like a lot of consumers these days. They're feeling pretty good about the economy, and they're looking for the right opportunity to buy the items they've been coveting. The point was underscored on Jan. 30, with a report from the U.S. Conference Board on rising consumer confidence and bullish earnings reports from consumer giants Procter & Gamble (PG) and Colgate-Palmolive (CL).

The Conference Board's survey of consumers revealed that an expanding labor market and rising wages are giving Americans more money to spend. Most Americans feel good enough about their situations that they plan to buy cars or homes in the next six months. The board's consumer confidence index for January rose to 110.3, from a revised 110.0 in December and 105.3 in November. "This month's slight increase in confidence was…fueled primarily by a more favorable job market," says Lynn Franco, director of the Conference Board Consumer Research Center.

Consumer Preferences

The one big cloud that's hanging over the economy is the housing market. Home prices have slid in a number of markets, hurting consumers' net worth and dropping the stocks of homebuilders such as Pulte Homes (PHM), KB Homes (KBH), and Lennar (LEN).

Still, other factors have eclipsed the softness in housing, at least for now. Besides jobs and wage growth, consumers are also pumped up about falling gasoline prices. The price of a gallon of gasoline fell to $2.23 on Jan. 15, from $2.29 a month earlier. And declining fuel prices are clearly leaving folks with more money to spend on other goods. Given that consumer spending makes up two-thirds of the U.S. economy, this bodes well for the overall economic outlook.

One area that people are definitely spending on is electronics. Brian Bethune, an economist at financial analysis firm Global Insight says that good bargains that started at the end of 2006 on flat-panel TVs led to a huge surge in the purchase of electronic goods in the last couple of months. "There have been some great deals on flat-panel TVs and that really makes people feel good," says Bethune. Indeed, as prices fell as much as 50%, sales of flat-panel televisions more than doubled in 2006 from 2005, according to NPD Group research. Nationwide, 11 million flat-panel televisions were sold, up from 5.3 million in 2005, according to Pacific Media Associates, which tracks sales from all TV manufacturers.

Cheerful Companies

Another positive sign is that people are eating out more. Sales at most restaurant chains have been positive in the last month. Comparative store sales at CKE Restaurants' (CKR) Hardee's chain rose 9.3% for 2006, and at its Carl's Jr. chain, they increased 5.6%. "We attribute these strong gains to the appeal of our premium-quality product strategy to the 'young, hungry guy' demographic," says Andrew Puzder, CKE's chief executive.

Procter & Gamble saw strong sales across a broader base of customers. As the consumer products giant released its earnings results on Jan. 30, it reported a 12% rise in its fiscal second-quarter profit and even raised its guidance for the year. "The results this quarter and a positive outlook for sales and margin improvement give us confidence to raise our top and bottom line guidance for the fiscal year," said A. G. Lafley, the company's chairman and chief executive, in a statement. The company even saw strong demand for some experimental variations on staples, including a new antiaging skin-care line called Olay Definity and Tide Simple Pleasures, a detergent that comes in scents such as rose-violet, vanilla-lavender, and water lily-jasmine.

Rival Colgate-Palmolive, the toothpaste maker, also saw its profits rise 11% in the fourth quarter, to $401.2 million, on a revenue increase of 10.5%, to $3.2 billion. "We are now in the best position we have ever been," says Colgate-Palmolive CEO Reuben Mark. U.S. consumers, it seems, are beginning to have some of the same feeling.

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