Consumer Confidence Hits Three-Year High on Economic Optimism

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Consumer confidence surged in February to its highest level in three years as Americans grew increasing confident that the economy -- and their income prospects -- will improve in the months ahead.

The index of consumer sentiment, which was released Tuesday by the Conference Board, climbed 5.6 points to 70.4 in February. A Bloomberg survey had expected it to rise just slightly, to 65 from 64.8 in January. The index's previous high was in 76.4 in February 2008.

Lynn Franco, director of the Conference Board's Consumer Research Center, said consumers continue to sense a strengthening economy and improving financial conditions for themselves, if not a substantial improvement in the job market.

Less Optimism About Employment Conditions

"The Consumer Confidence Index is now at a three-year high, due to growing optimism about the short-term future. Consumers' assessment of current business and labor market conditions has improved moderately, but still remains rather weak," Franco said, in a statement. "Looking ahead, consumers are more positive about the economy and their income prospects, but feel somewhat mixed about employment conditions."

The index's key components also progressed in February. Those claiming current conditions are "good" increased to 12.4% in February from 11.3% in January, while those claiming business conditions are "bad" was unchanged at 39.6%.

Those expecting an improvement in business conditions over the next six months increased to 24.4% in February from 24% in in January, while those expecting business conditions to worsen decreased to 10.4% from 12.2%.

On future job prospects, the results were mixed. Those anticipating more jobs in the months ahead dipped to 19.8% in February from 20.8% in January, while those anticipating fewer jobs decreased to 15.4% from 21.2%.

Those saying jobs are "plentiful" inched higher to 4.9% in February from 4.6% in January, while those saying jobs are "hard to get" decreased to 45.7% from 47%.

The number of consumers expecting an income increase rose to 17.3% in February from 15.3% in January.

Economists monitor the index because, historically, rises in consumer confidence are directly correlated with increases in consumer spending. Moreover, consumer spending has accounted for a large portion of U.S. GDP. Hence, if confidence rises, and a trend forms, that most likely means good things are ahead for corporate revenue and earnings. Falling confidence, however, signals the opposite.

In Sync with Economic Conditions

February's consumer confidence report -- the first using a new survey provider -- is a positive sign for investors. Consumer confidence continues to improve along with with U.S. economic conditions. Americans sense that business conditions, as reflected by both adequate to good quarterly corporate earnings and the stock market's rise, are improving, and that the U.S. economy is growing at a decent pace.

However, consumers are understandably more cautious regarding the job market. They sense that layoffs are subsiding, but they still aren't totally convinced that a period of job growth has started. Provided that the U.S. labor market continues to heal in the quarters ahead, consumer confidence should continue to rise and support U.S. GDP growth in 2011.
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