US consumer sentiment hits second-highest since 2007

Low fuel costs and labour market progress are expected to keep households upbeat

Consumer confidence increased in April to the second-highest level in more than eight years as Americans grew more upbeat about their financial prospects. The University of Michigan said that its final index for the month increased to 95.9 from 93 in March. The median projection in a Bloomberg survey of economists was for 96, little changed from the preliminary April reading of 95.9.

A stronger sense of job security and building momentum in wage growth are helping to buoy confidence, which may encourage consumers to spend rather than save their paychecks. Low fuel costs and continued labour market progress will help keep households upbeat even as the Federal Reserve considers raising interest rates for the first time since 2006. "Confidence is down from its absolute high in the last couple months, but it still shows a clear net pickup recently," Jim O'Sullivan, chief US economist at High Frequency Economics in Valhalla, New York, said before the report. "The confidence numbers look consistent with consumer spending picking up."

Estimates in the Bloomberg survey of 59 economists ranged from 93 to 97.5. The index average 84.1 last year. The sentiment survey's current conditions index, which takes stock of Americans' views of their personal finances, rose to a three-month high of 107 in April from 105. The measure of expectations six month from now increased to 88.8 from 85.3.

"Personal financial prospects have improved significantly," Richard Curtin, director of the Michigan Survey of Consumers, said in a statement. "Financial gains were expected by 37 per cent of all consumers in April. Although just above the 36 per cent recorded in the prior two months, it was the highest proportion recorded since April 2007."

Americans expected an inflation rate of 2.6 per cent in the next year, down from 3 per cent in March. Over the next five to 10 years, they also expect a 2.6 per cent rate of inflation, compared with 2.8 percent in the previous month.

The consumer sentiment report is at odds with other figures released this week. The Bloomberg Consumer Comfort Index fell to 44.7 in the period ended April 26, the third consecutive drop, from 45.4 the prior week.

The Conference Board's consumer confidence index dropped to a four-month low of 95.2 in April, weaker than the most pessimistic forecast in a Bloomberg survey of economists.

Fed policy-makers are keeping an eye on consumer attitudes, inflation and other markers of economic health as they weigh the timing of their first increase in the benchmark interest rate since 2006. The outlook took a hit this week as a report showed the economy barely grew in the first quarter, expanding at a 0.2 per cent annual rate after a 2.2 per cent in the final three months of 2014.

"Overall, the near- and longer-term outlooks for the economy, while slightly below the peaks recorded three months ago, were the second-most favourable levels recorded since 2004," Curtin said. "Prospects for the unemployment rate in April were only more favourable in four other surveys since 1984."

In a statement issued Wednesday after a two-day meeting, Fed policy makers left open the possibility of raising interest rates in the second half of the year by chalking the economy's slowdown up to "transitory factors."

"Households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high," Chair Janet Yellen and her colleagues said in the statement. "Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labour market indicators continuing to move toward levels the Committee judges consistent with its dual mandate."

The Fed repeated that it will raise rates when it sees further labour-market improvement and is "reasonably confident" inflation will rise back to its 2 per cent goal over time.

Bigger pay gains might help price increases get closer to that target. Wages and salaries climbed by 0.7 per cent following a 0.6 per cent increase in the fourth quarter, the Labor Department said. Private wages, which exclude those government workers, rose 2.8 per cent in the last year, the biggest advance since the third quarter of 2008.

In the meantime households may be counting on continued savings from cheap gasoline to help pad their balance sheets. While the average cost of a gallon of regular gasoline was $2.58 on April 29, the highest since mid-December, it's down from last year's peak of $3.70.

Cheap gas may persuade more Americans to hit the road, benefiting companies such as midscale hotel owner and franchiser La Quinta Holdings Inc, Chief Executive Officer Wayne Goldberg said on an April 29 earnings call.

"We feel very good that all of the indications from a leisure standpoint are very positive," Goldberg said. "We see an economy improving."

More gains in consumer confidence may persuade households to boost spending, which was lackluster in the first quarter. Consumption climbed at a 1.9 per cent annualised rate in the first three months of the year, less than half the pace of the prior three months, when spending climbed at the fastest rate since 2006.