Consumer Confidence, Housing Data Signal Economy's Resilience

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By Lucia Mutikani

WASHINGTON -- Consumer confidence hit a seven-month high in August and new single-family home sales rebounded in July, suggesting underlying strength in the economy that could still allow the Federal Reserve to raise interest rates this year.

Other data released Tuesday showed moderate gains in house prices in June, which should support consumer spending and keep home purchasing affordable, especially for first-time buyers.

%VIRTUAL-pullquote-This is evidence of the 'some further improvement' in the economy that the Fed is waiting for to raise rates.%"This is evidence of the 'some further improvement' in the economy that the Fed is waiting for to raise rates. They are so close, they need just a little more confirmation," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

The Conference Board said its consumer index jumped 10.5 points to 101.5 this month, the highest reading since January, amid optimism over the labor market. The survey, however, was conducted before a global equity markets sell-off that began last week, which has diminished the chances of a U.S. rate hike next month.

Although sentiment could retreat in September, economists said any decline was likely to be modest, with U.S. stock markets appearing to stabilize Tuesday. A strong labor market, lower gasoline prices and an improving housing market also are seen supporting consumer confidence.

The survey's so-called labor market differential, which closely correlates to the unemployment rate in the employment report, was the most favorable since January 2008.

The share of consumers expecting an increase in incomes slipped, but fewer anticipated a decline.

"If this upbeat sentiment is sustained, then it could potentially provide a strong platform for a sustained upswing in consumer spending activity, which could provide a strong tailwind for the economic recovery going forward," said Millan Mulraine, deputy chief economist at TD Securities in New York.

In a separate report, the Commerce Department said Tuesday new home sales increased 5.4 percent to a seasonally adjusted annual rate of 507,000 units. Those sales, which account for 8.3 percent of the market, were up 25.8 percent compared to July of last year.

The reports, which added to a steady stream of data that have painted an optimistic picture of the U.S. economy, helped stocks on Wall Street to stage their sharpest rally of the year. Market sentiment was also boosted by China's second interest rate cut in the past two months.

The dollar jumped against a basket of currencies, while prices for U.S. Treasuries fell.

Gaining Steam

The prospects of a U.S. rate hike next month already had been dealt a blow before the recent global markets turmoil, with the minutes of the Fed's July 28-29 policy meeting highlighting policymakers' concerns about persistently low inflation.

"We think that the Fed will not raise rates in September, they need a little time to digest what has happened and we think they will raise in December," said Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts. "Prior to Friday, we thought that the Fed would raise rates in September."

New home sales rose in three of the four U.S. regions last month, touching a 14-month high in the Northeast.

The housing market is gaining steam, with data last week showing home resales jumped to a near 8½-year high in July and groundbreaking on new home building climbing to its highest level since October 2007.

The recovery in the sector, which touches almost all spheres of the U.S. economy, is being driven by the tightening labor market. A third report showed the S&P/Case Shiller composite index of 20 metropolitan areas gained 5 percent in June year-over-year compared to a gain of 4.9 percent in May.

"If the pace of appreciation stabilizes around current levels, it could provide enough incentive to encourage homeowners to put their homes on the market, while encouraging potential homebuyers back into the market," said Lewis Alexander, chief economist at Nomura in New York.

The sturdy housing market is boosting homebuilders. Toll Brothers (TOL), the largest U.S. luxury home builder, said on Tuesday that orders had risen 16 percent so far in the quarter started in August, outpacing the 12 percent rise in the company's third quarter.

The Commerce Department said the stock of new houses for sale increased 1.9 percent to 218,000 last month, the highest level since March 2010. Still, supply remains less than half of what it was at the height of the housing boom.

At July's sales pace it would take 5.2 months to clear the supply of houses on the market, down from 5.3 months in June.

-Richard Leong and Rodrigo Campos contributed reporting from New York.

9 Numbers That'll Tell You How the Economy's Really Doing
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Consumer Confidence, Housing Data Signal Economy's Resilience
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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