Confidence Rises in Sign U.S. Will Keep Recovery Intact

By Shobhana Chandra - Oct 29, 2011 1:29 AM GMT+0700

Consumer confidence unexpectedly rose in October from the previous month, indicating the biggest part of the economy will help keep the U.S. recovery intact.

The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 60.9 from 59.4 in September. The gauge was projected to drop to 58, according to the median forecast of 66 economists surveyed by Bloomberg News. The preliminary reading for the month was 57.5.

Stock market gains and easing gasoline costs have brought relief to Americans at a time the jobless rate is hovering above 9 percent and home prices continue to fall. A sustained improvement in moods may encourage consumers to accelerate their spending, which accounts for about 70 percent of the economy.

“Consumers are not throwing caution to the winds, but their mood has lifted slightly from the recession-type readings late this summer,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who forecast a reading of 60. “The stock market is sharply higher and the consumer is back in a spending mind frame.”

Estimates for the confidence measure ranged from 55 to 60, according to the Bloomberg survey. The index averaged 89 in the five years leading up to the recession that began in December 2007.

More Spending

Consumer spending accelerated in September, helping the world’s largest economy skirt a recession, another report showed today. Purchases increased 0.6 percent, matching the median estimate of 81 economists surveyed by Bloomberg, after a 0.2 percent gain the prior month, according to Commerce Department figures. Incomes rose less than projected, sending the savings rate down to the lowest level in almost four years.

The Standard & Poor’s 500 Index fell 0.3 percent to 1,280.91 at 2:27 p.m. New York time. The gauge rallied 3.4 percent yesterday, extending its biggest monthly rally since 1974 as European leaders agreed to expand a bailout fund.

Today’s Michigan sentiment report contrasts with the Bloomberg Consumer Comfort Index, which fell to minus 51.1 in the week ended Oct. 23, the lowest in a month. Ninety-five percent of those surveyed had a negative opinion about the economy, the worst since April 2009 and one percentage point shy of a record high, according to figures reported yesterday.

The Conference Board’s monthly sentiment index, which more closely follows the labor market, plunged in October to a low, a report showed this week.

Present Conditions

The Michigan survey’s index of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, rose to a three-month high of 75.8 from 74.9 the prior month.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, climbed to 51.8, also the highest since July, from 49.4.

Consumers in today’s confidence report said they expect an inflation rate of 3.2 percent over the next 12 months, compared with 3.3 percent in the prior survey.

Over the next five years, the figures tracked by Federal Reserve policy makers, Americans expected a 2.7 percent rate of inflation, compared with 2.9 percent the previous month.

Fuel prices are easing. The average cost of a gallon of regular gasoline at the pump was $3.43 this month through yesterday, down from $3.58 in September, according to AAA, the nation’s biggest motoring organization.

Confidence ‘Weak’

Still, Jones Group Inc. (JNY), a New York-based maker of women’s clothing and footwear, is among companies concerned about the “mixed signals in the economy,” according to Chairman Wesley Card. “With a constant stream of political noise, this is translating to weak consumer confidence.”

“The level of consumer spending continues to be a question mark as we move into the fourth quarter,” Card said on a conference call with analysts on Oct. 26. The American shopper “remains very much in a buy-now, wear-now mode and is responding to new fashion and promotional activity,” he said, while sales of “more basic and lower-priced commodity items have been weaker.”

Keeping spending from improving more is the slow job market. A Labor Department report next week may show payrolls grew by about 100,000 in October after a 103,000 gain the prior month, economists in a Bloomberg survey projected. The jobless rate was probably 9.1 percent for a fourth month.

President Barack Obama last month proposed a $447 billion plan to stimulate jobs, which included expanding a payroll tax break due to expire at the end of 2011, increasing spending on public works and extending jobless benefits.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net