Consumer Sentiment in U.S. Increases to Six-Year High July

Consumer confidence unexpectedly increased in July to the highest level in six years as Americans’ views of their finances improved.

The Thomson Reuters/University of Michigan final index of consumer sentiment advanced to 85.1 in July from 84.1 at the end of June. Economists in a Bloomberg survey called for 84, according to the median projection after a preliminary reading of 83.9.

An increase in personal wealth tied to higher property values and stock portfolios is keeping confidence elevated and consumers spending. Stronger finances, along with job gains that have picked up from the second half of 2012, are also helping blunt the effects of higher payroll taxes.

“The labor market’s better, you’re seeing home prices rise, you’re seeing equity prices rise, so there are a lot of things out there to be positive about,” said Brian Jones, senior U.S. economist in New York at Societe Generale, who predicted an increase in confidence from June. “If you think about the things that drive consumer confidence, they should be rising as well through the end of the year.”

Stocks fell, with the Standard & Poor’s 500 Index heading for its first weekly decline in more than a month, as investors weighed corporate earnings. The S&P 500 decreased 0.5 percent to 1,682.43 at 10:29 a.m. in New York.

Estimates of the 63 economists in the Bloomberg survey ranged from 83 to 86. The index is close to the average of 89 in the five years leading to the last recession that began in December 2007. During the 18-month slump that ended in June 2009, the gauge averaged 64.2.

Buying Attitudes

The survey showed income and job growth helped bolster buying attitudes, especially for big purchases such as cars and homes. Younger households reported greater incomes, reflecting improvements in employment and hours worked, while middle- and upper-income Americans were more likely to report asset gains.

Today’s figures compare with the weekly Bloomberg Consumer Comfort Index which rose last week to match its highest level since January 2008. The Bloomberg gauge improved to minus 27.3 in the period ended July 21 from minus 28.4.

The Michigan survey’s current conditions index, which takes stock of Americans’ view of their personal finances, climbed to a six-year high of 98.6 in July from 93.8 last month. The preliminary July figure was 99.7.

Expectations Dim

The index of expectations six months from now fell to 76.5 this month from 77.8 in June. The preliminary July reading was 73.8.

Expectations of higher borrowing costs dimmed the reading on expectations for the economy. The survey results showed interest rates were expected to climb in the coming year by 68 percent of all consumers, up from 55 percent in June and the highest share since August 2006.

The consumer sentiment measure has increased since the end of last year, when it stood at 72.9. More optimism is translating into higher sales at companies such as US Airways Group Inc.

Tempe, Arizona-based US Airways, on track to become the world’s largest carrier once it completes its merger with AMR Corp., reported higher revenue in the second quarter as demand recovered from the effects of across-the board federal spending cuts, President Scott Kirby said on a July 24 conference call with analysts.

More Demand

“Going forward, the demand environment remains quite good for both leisure and business demand,” Kirby said on the call. “Stronger consumer confidence, business confidence and macroeconomic performance seemed to be combining to drive the improved revenue environment.”

Confidence is getting a boost from an improving labor market. Employment climbed by 202,000 a month on average in the first six months of this year, up from 180,000 in the second half of 2012, Labor Department data show.

Americans may also be feeling wealthier as real estate prices climb and stocks hold near record highs. Home values in the U.S. increased 12.2 percent in May from a year earlier, the largest advance since February 2006, according to data earlier this month from Irvine, California-based CoreLogic Inc.

The S&P 500 is hovering close to the record high of 1,695.53 reached on July 22.

Inflation Expectations

Today’s Michigan survey showed that Americans expect an inflation rate of 3.1 percent over the next year, up from 3 percent in June. Over the next five years, Americans expect a 2.8 percent rate of inflation, down from 2.9 percent in the previous three months.

Inflation expectations are little changed from the end of 2012. Some companies are finding they still need to cater to the price-sensitive consumer as unemployment lingers above 7 percent.

Some Wendy’s Co. “customers are just very sensitive to the economics that they face in their life,” Chief Executive Officer Emil Brolick said in a July 23 conference call to discuss second quarter earnings. “You have to give them a price value offering if you’re going to get them to come to your restaurant significantly.”

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