(January 26) – “With unemployment continuing to fall and the economic boom nearing a record as the longest in U.S. history, consumers began the new year with confidence in the economy soaring to an all-time high,” writes Yochi Dreazen in The Wall Street Journal this morning.
“The Conference Board’s monthly index measuring the economic outlook of U.S. households jumped three points in January, to 144.7 from 141.7 in December, and now stands at the highest level in the survey’s 32-year history. The increase is the fourth straight monthly rise for the index, which has more than recovered from a slump in the summer and fall.
“‘This is an astonishingly strong report,’ Ian Shepherdson, chief U.S. economist for High Frequency Economics in Valhalla, N.Y., told his clients.
“The survey, considered a good predictor of consumer demand, offers further evidence that consumer spending is likely to remain strong into the immediate future. With jobs remaining plentiful, economists said consumers weren’t fazed by recent stock-market volatility, rising mortgage rates or surging energy prices.
“‘An expanding global economy and a robust job market suggest that consumer optimism and consumer spending could rise even further,’ said Lynn Franco, the economist who oversees the survey of 5,000 households for the New York-based private research firm.
“Should consumer spending — which accounts for almost two-thirds of total U.S. economic output — remain strong, it becomes almost a certainty the economy will continue to grow at least through February, which will make the current expansion the longest in the nation’s history.
“‘We’ve not only had a long expansion, but we’ve had a healthy one that has really brought down unemployment,’ said Gary Thayer, chief economist with A.G. Edwards & Sons in St. Louis. ‘How people feel today is a direct reflection of the tight job market.’
Home Sales Set Record for ’99
“A continued surge in consumer spending, though, could raise red flags among Federal Reserve policy makers, who remain concerned consumer demand may outstrip demand, leading to inflationary pressures. Most observers expect the Fed to raise rates by at least a quarter-point at its February and March meetings in an effort, in part, to curb consumer spending.
“While the overall strength of the consumer-confidence numbers may raise doubts as to whether last year’s three Fed rate increases had any effect, economists said the survey offered some evidence of at least a partial slowdown.
“Specifically, the percentage of households saying they planned to buy a new home in the next six months slipped 0.7% in January. The housing market is often the first to feel the impact of a Fed rate increase, and economists say home purchases are a prime driver of broader consumer spending.
“Tuesday, the National Association of Realtors said sales of existing homes rose 4.6% during 1999 to a record 5.2 million, although home sales were lower in December due to rising mortgage rates. ‘Higher mortgage rates in the aftermath of a Fed move will cause home sales to slow even further, and that’ll slow spending in a lot of different categories,’ said Mark Vitner, an economist with First Union Corp. in Charlotte, N.C.
“Consumer attitudes toward the purchase of other big-ticket items were mixed, with the percentage saying they planned to buy a major appliance falling while the percentage planning to buy a new car rose slightly.