Consumer Confidence Jumps; Producer Prices Surge

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Producer Price Index
David Goldman/APMaria Cantellano tosses a Watermelon to her daughter as they load up a customer's pickup truck at their stand at the Atlanta Farmers Market in Atlanta.
By Lucia Mutikani

WASHINGTON -- U.S. consumer confidence surged in early June on expectations that a tightening labor market would spur big wage raises, which could further stimulate spending and overall economic growth later this year.

The upbeat consumer sentiment survey Friday capped off a week of strong economic data and was the latest indication that growth was regaining momentum after a sluggish start to the second quarter.

The rise in sentiment came despite higher gasoline prices, which contributed to producer prices recording their biggest increase in more than 2½ years in May.

Strong consumer confidence, together with a tightening labor market, bullish retail sales and firming inflation pressures may provide the Federal Reserve reassurance about the U.S. economic outlook amid expectations it will hike interest rates this year.

The U.S. central bank's policy-setting committee meets Tuesday and Wednesday.

"While more progress needs to be seen before the Fed feels sufficiently confident in the sustainability of the recovery, they will certainly take comfort in the fact that things are beginning to move in the right direction," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Fed has kept its benchmark overnight lending rate near zero since December 2008 and is not expected to raise rates before September.

The University of Michigan's consumer sentiment index rose to 94.6 in early June from 90.7 in May.

Consumers were the most favorable about their personal financial prospects since 2007, with households expecting the largest wage gains since 2008. Consumers also expected inflation to remain low over the foreseeable future.

"We could get more good news on the spending front in the coming months," said Bricklin Dwyer, an economist at BNP Paribas in New York.

The economy contracted in the first quarter, weighed down by a host of factors, including bad weather, port disruptions and a strong dollar. Growth estimates for the second quarter were raised this week to as high as a 3.2 percent annual rate.

U.S. financial markets were little moved by Friday's data as traders focused on the latest twists in Greece's debt crisis. U.S. Treasury debt prices were higher, while the dollar slipped against a basket of currencies. U.S. stocks indexes also fell.

Inflation Stabilizing

In a separate report, the Labor Department said its producer price index for final demand increased 0.5 percent last month, the largest gain since September 2012. It followed a 0.4 percent decline in April.

The data suggested an oil-driven downward drift in prices was nearing an end. The stabilization in inflation, together with tightening labor market could see inflation rise back toward the Fed's 2 percent target.

%VIRTUAL-pullquote-Inflation pressures have a heartbeat and should rise further over the next year as the economy is at or very near full employment levels.%"Inflation pressures have a heartbeat and should rise further over the next year as the economy is at or very near full employment levels," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

In the year to May, the PPI fell 1.1 percent, marking the fourth straight 12-month decrease. Prices dropped 1.3 percent in the 12 months through April, the biggest fall since 2010.

A sharp decline in crude oil prices since last year and the strong dollar have weighed on producer prices.

Last month, gasoline prices surged 17 percent, the largest increase since August 2009. Food prices rose 0.8 percent in May, the biggest gain in just over a year, snapping five straight months of declines.

Higher food prices were driven by a shortage of eggs after an outbreak of bird flu led to the culling of millions of chickens. Wholesale egg prices soared a record 56.4 percent last month.

Higher gasoline and food prices are likely to feed into the May consumer price index. May consumer price data will be published next week.

The volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, increased 0.6 percent in May after falling 0.8 percent in the prior month.

May's rise likely reflects improving profit margins at services station, which had been pressured by falling gasoline prices.

A key measure of underlying producer price pressures that excludes food, energy and trade services slipped 0.1 percent last month after ticking up 0.1 percent in April. The so-called core PPI was up 0.6 percent in the 12 months through May.

9 Numbers That'll Tell You How the Economy's Really Doing
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Consumer Confidence Jumps; Producer Prices Surge
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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