Consumers Sense Change as Confidence Jumps to Highest Level Since May

Consumer confidence unexpectedly surged in January as Americans grew increasingly confident that both the economy and labor market will continue to improve in the months ahead.

The Conference Board's January index of consumer attitudes soared 7.3 points to 60.6 -- the first time the index has been above 60 since May 2010. A Bloomberg survey had expected it to rise to 54.3 in January after a revised 1-point decline in December.

Lynn Franco, director of the Conference Board's Consumer Research Center, said consumers sensed a change for the better as the new year started.

"Consumers have begun the year in better spirits. As a result, the Index is now near levels not seen since last spring [May 2010, at 62.7]. Consumers rated business and labor market conditions more favorably and expressed greater confidence that the economy will continue to expand and generate more jobs in the months ahead," Franco said in a statement. "Income expectations are also more positive. Although pessimists still outnumber optimists, the gap has narrowed."

A Better Six-Month Outlook

The index's components also progressed in January. Regarding current conditions, those claiming conditions are "good" increased to 9.8% from 7.7% in December, while those claiming business conditions are "bad" was unchanged at 40.4%.

Concerning the economy's six-month outlook, those expecting an improvement in business conditions increased to 19% in January from 16.8% in December, while those expecting business conditions to worsen decreased to 11.3% from 11.8%.

On future job prospects, the results were slightly better than the December survey. Those anticipating fewer jobs in the months ahead declined to 17.5% in January from 19.2% in December, while those anticipating more jobs rose to 16% from 14.2%.

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Economists monitor the consumer confidence 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. Of course, falling confidence signals the opposite.

January's Conference Board index shows consumer confidence is trending in the right direction, and it's improving in sync with U.S. economic conditions. Americans sense that layoffs are subsiding, the economy is growing, and many companies -- from earnings and cash balance standpoints -- are in good shape.

Provided the U.S. labor market continues to heal in the quarters ahead, consumer confidence should continue to rise -- something that should trigger additional consumer spending and support U.S. GDP growth in 2011.