US pessimism about the economy appears to be lifting


Excerpt from TheStarOnline dated 26/8/09

Published: Wednesday August 26, 2009 MYT 7:28:00 AM

WASHINGTON: Americans’ pessimism about the economy appears to be lifting, with consumer expectations for the next six months hitting their most positive point since the recession began.

The improvement stems partly from the housing market, as a national gauge of home prices on Tuesday posted its first quarterly increase in three years.

The consumer and housing reports, along with President Barack Obama’s reappointment of Ben Bernanke as Federal Reserve chief, sent the financial markets modestly higher.

But economists warned that consumer confidence remains far below levels associated with a healthy economy and might not lead to the increased spending critical for a broad recovery.

“People’s spending decisions depend more on whether they have money in their pocket than on how they feel,” said Bill Cheney, chief economist at John Hancock Financial.

Still, Cheney and other economists said Tuesday’s report on consumer sentiment was encouraging.

The New York-based Conference Board said its Consumer Confidence index rose to 54.1, from an upwardly revised 47.4 in July.

That reading reversed two months of decline and easily beat analysts’ expectations.

Economists closely monitor confidence because consumer spending accounts for about 70 percent of U.S. economic activity.

Consumer sentiment, fueled by signs the economy is stabilizing, has recovered a bit since hitting a record-low of 25.3 in February.

A reading of 90 indicates the economy is on solid footing; anything above 100 signals strong growth.

Consumers’ expectations for the economy over the next six months rose to 73.5 from 63.4 in July, the highest level since December 2007, when the recession began.

The consumer confidence survey was sent to 5,000 households and had a cutoff date for responses of Aug. 18.

More consumers said they were likely to buy a home or a car within the next six months than said so in July’s survey.

The outlook for jobs also improved, albeit from very low levels.

The housing sector received positive news, too.

The Standard & Poor’s/Case-Shiller’s U.S. National Home Price Index rose 1.4 percent in the second quarter from the January-March period, the first quarterly increase in three years.

Home prices, though still down nearly 15 percent from last year, are at levels last seen in early 2003.

The report added to other recent positive news about housing.

The National Association of Realtors said last week that sales of existing homes rose 7.2 percent in July, the fourth straight monthly gain.

The Commerce Department on Wednesday is set to report new-home sales for July. Analysts also expect that figure to rise.

Higher home prices would help consumers, who are saving more and spending less as their wealth plummets during the longest recession since World War II.

Falling home prices and dwindling stock portfolios made many people, even those with jobs, feel poorer.

“An upturn in prices has to ease some of the pain and may even get some people to loosen up on their wallets a touch,” Joel Naroff, chief economist at Naroff Economic Advisors, wrote in a note to clients.

“An improving housing market coupled with better consumer spending could ensure that the recovery takes hold.”

On Wall Street, stocks posted gains.

The Dow Jones industrial average rose about 30 points, or 0.32 percent, and broader stock averages also gained.

Many analysts expect the economy to grow 2-3 percent in the current July-September quarter, spurred by a more stable housing market and the Cash for Clunkers program, which has boosted auto sales.

But economists worry that without healthier consumer spending, the recovery may weaken next year.

Cash for Clunkers, which provided rebates of up to $4,500 to consumers who traded in old cars for fuel-efficient ones, ended Monday.

Obama said Tuesday that his administration’s $787 billion stimulus package, and the extraordinary efforts by Bernanke to pump trillions of dollars into the financial system, have helped turn the economy around.

“Our auto industry is showing signs of life,” Obama said.

“Business investment is showing signs of stabilizing. Our housing market and credit markets have been saved from collapse.”

Jobs are a weak spot, however, and could limit future consumer spending if Americans remain concerned about layoffs or declining wages.

Obama economic adviser Christina Romer predicted Tuesday that unemployment could reach 10 percent this year and average 9.8 percent next year.

That’s up from its current level of 9.4 percent.

Frank Newport, editor-in-chief of the Gallup Poll, said consumer spending dropped last week, according to its daily surveys.

“We’re not seeing a sustained increase in consumer spending yet,” he said.

Gallup asks 3,500 people each week about their recent shopping activity.

That could be a problem for retailers. Many economists expect to see another holiday season of sales declines, after last year’s Christmas period was the weakest in several decades.

Holiday shopping accounts for up to 40 percent of annual sales for many retailers. Recent reports from retailers have been mixed.

On Tuesday, office supply chain Staples Inc. said same-store sales fell 5 percent in the second quarter.

That was an improvement from a drop of 8 percent the previous quarter.

Last week, Ann Taylor Stores Corp. said same-store sales, or sales at stores open at least one year – a key retail metric_ fell 23 percent in its second quarter as the company lost $18 million.

The White House also released updated budget deficit projections Tuesday.

The administration said the deficit for the current budget year, which ends Oct. 1, will total a record $1.6 trillion, while deficits for the next 10 years could total $9 trillion. – AP

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