Consumer Confidence Jumps as U.S. Home Values Climb: Economy

Consumer confidence unexpectedly jumped in April, and the rebound in home values accelerated earlier this year, showing the recovery in residential real estate is buttressing the U.S. economy.

The Conference Board’s sentiment index climbed to 68.1, exceeding the highest estimate in a Bloomberg survey of economists, data from the New York-based private research group showed today. The S&P/Case-Shiller index of home prices in 20 cities rose 9.3 percent in February from the same month in 2012, the biggest year-to-year advance since 2006.

“It’s pretty clear that housing is recovering,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, and the second-best confidence forecaster for the past two years, according to data compiled by Bloomberg. “That’s a positive for growth. It boosts wealth and confidence.”

Rising home and stock prices are helping repair finances left in tatters by the recession, leading to gains in sentiment that may limit any slowdown in household spending, the biggest part of the economy. For now, an increase in the payroll tax and cuts in federal outlays may be starting to pinch, prompting a slackening in manufacturing that is restraining growth.

The MNI Chicago Report’s business barometer, considered a proxy for factory activity, fell to 49 in April, the lowest level since September 2009, from 52.4 last month, other figures showed today. A reading less than 50 signals contraction.

Second Half

“Ultimately, manufacturing will start improving again in the second half of the year as fiscal drag starts to fade, but for now, it’s still looking pretty sluggish,” O’Sullivan said.

Stocks rose, sending the Standard & Poor’s 500 Index to another high, after the gain in confidence and as investors weighed corporate earnings. The S&P 500 advanced 0.3 percent to 1,597.57 at the close in in New York.

Elsewhere, inflation in the euro area dropped to a three-year low in April and unemployment climbed to 12.1 percent in March, the highest since records began in 1995, according to figures from the European Union’s statistics office in Luxembourg. The data increase pressure on the European Central Bank to cut interest rates later this week to spur growth.

The median estimate of 72 economists surveyed by Bloomberg projected the consumer confidence gauge would increase to 61. Forecasts ranged from 54.5 to 66.5. The Conference Board revised the reading in March up to 61.9 from a previously reported 59.7. The measure averaged 53.7 in the recession that ended in June 2009.

Expectations Improve

The increase in the confidence gauge was led by a gain in the measure of expectations for the next six months, which climbed to a five-month high.

The share of households projecting their incomes will rise over that time period advanced to the highest since April 2011.

“The fact that they feel a little bit wealthier will give them a little more leeway,” said Brian Jones, senior U.S. economist in New York at Societe Generale. Still, “you’re going to have a spring lull, and growth will reaccelerate in the second half of the year. I do think the labor market is genuinely getting better.”

Today’s figures are in line with the Bloomberg Consumer Comfort Index. That measure in the week ended April 21 was close to the highest since January 2008. At the same time, the Thomson Reuters/University of Michigan index of consumer sentiment fell in April to a three-month low.

‘Mixed Signals’

Chipotle Mexican Grill Inc. is among companies seeing a lack of consistency from the American consumer.

“It seems like the economy is off to a great start and then every time, about this time every year for the last two years in the spring, we get mixed signals on consumer confidence and job creation and things like that,” Chief Financial Officer John Hartung said in an April 18 conference call.

Household spending in the first quarter increased at a 3.2 percent annualized rate, the biggest gain since the fourth quarter of 2010, Commerce Department figures showed April 26.

At the same time, a report yesterday showed spending began to cool late in the quarter. Purchases climbed 0.2 percent in March after a 0.7 percent surge in the prior month, the Commerce Department said. Economists project outlays in the current quarter will grow at a 1.8 percent annual rate, according to the median estimate in a Bloomberg survey from April 5 to April 9.

Hindering households is the two percentage-point increase in the tax that funds Social Security, which took effect at the start of the year. Americans earning $50,000 a year are taking home about $80 less a month.

More Equity

On a more positive note, the increase in real-estate values is helping some homeowners recover home equity. Home prices adjusted for seasonal variations rose 1.2 percent in February from the prior month, the biggest gain since October 2005, after climbing 1 percent in January, according to today’s report from S&P/Case-Shiller.

The year-over-year gauge provides better indications of trends in prices, according to the group. The panel includes Karl Case and Robert Shiller, the economists who created the index.

“Home prices continue to show solid increases,” David Blitzer, chairman of the S&P index committee, said in a statement. “Housing continues to be one of the brighter spots in the economy.”

On the other hand, manufacturing, which makes up 12 percent of the economy, is becoming a concern. The Chicago index today showed measures of production, employment and inventories slumped this month.

Orders Firm

One positive note was that orders held up, signaling last month’s retreat may be short-lived.

Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers, making the gauge a measure of total growth. Its members have operations across the U.S. and abroad.

The Institute for Supply Management’s monthly national factory index probably also cooled this month, according to the median forecast of economists surveyed. The Tempe, Arizona-based group’s figures are due tomorrow.

Manufacturers are more optimistic about sales and spending this year than they were at the end of 2012, while service providers were less upbeat, according to results of a semiannual survey by the ISM issued today.

“We’re not seeing anything tailing off drastically,” said Lou Crandall, chief economist at Wrightson Icap LLC in Jersey City, New Jersey, and the top forecaster for the MNI Chicago Report. “We’re just fighting through another sluggish period.”