Consumer Sentiment in U.S. Rises to Highest Since July 2007

Consumer confidence rose in May to the highest level in almost six years as a rising stock market and property values helped lift Americans’ outlook on the economy.

The Thomson Reuters/University of Michigan final index of sentiment increased to 84.5 in May, the strongest since July 2007, from 76.4 a month earlier. The median forecast in a Bloomberg survey called for the gauge to hold at its preliminary reading of 83.7.

The increase in personal wealth from higher real-estate values and stock prices that’s bolstering sentiment may help keep consumer spending from faltering after a decline in April. Household finances also helping blunt the effect of higher payroll taxes and federal budget cuts that threaten to limit hiring.

“Housing is improving, house prices are rising, gasoline prices have been a support for much of this year to confidence, and we have stock prices that have climbed -- I think all of that is helping to lift consumer sentiment,” Ryan Sweet, senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said before the report. “If consumers remain relatively upbeat about the economy’s prospects, they’re unlikely to pull back on spending.”

Forecasts of the 64 economists in the Bloomberg survey ranged from 81.5 to 85.8. The index averaged 64.2 during the recession that ended in June 2009, and 89 in the five years prior to the 18-month slump.

Personal Spending

Another report today showed consumer spending, which accounts for about 70 percent of the economy, unexpectedly declined in April as incomes stagnated at the start of the second quarter. Purchases dropped 0.2 percent after a 0.1 percent gain that was smaller than previously estimated, the Commerce Department said. Incomes were unchanged.

The Michigan survey’s current conditions index, which takes stock of Americans’ view of their personal finances, jumped to 98 in May, the highest reading since August 2007, from 89.9 last month. The preliminary May figure was 97.5.

The index of expectations six months from now surged to 75.8 this month from 67.8 in April and a preliminary May reading of 74.8.

The Michigan report corroborates other measures this week of sentiment. The Bloomberg Consumer Comfort Index held near a five-year high last week as Americans’ views on the current state of the economy matched a mid-April reading that was the strongest since January 2008. The Conference Board’s confidence index rose in May to the highest level since February 2008.

High-Income Earners

The Bloomberg measure showed sentiment for households earning between $75,000 and $100,000 annually reached a five-year high, climbing last week to within a point of the reading for those making even more.

The outlook has shown less improvement for lower-income consumers, who continue to struggle with the effects of higher taxes that went into effect in January, said Mary Winston, chief financial officer at Family Dollar Stores Inc., a discount retail chain based in Matthews, North Carolina.

“There continues to be pressure on that consumer,” Winston said at a May 21 conference. “They’re going to continue to focus on buying the things that they need, because they do live on a fixed budget and as fluctuations occur in the economy or as unexpected things happen like payroll tax increases or whatever, that causes them to spend less on more discretionary items. We’ve certainly seen that in our business.”

The Michigan survey showed that Americans expect an inflation rate of 3.1 percent over the next 12 months, the same as in April. Over the next five years, Americans expect a 2.9 percent rate of inflation, also the same as the previous month.

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