Rising Consumer Confidence To Boost Growth

Popular Economics Weekly

Consumers seem to finally be consuming their normal share of economic growth—which is currently 68.2 percent of GDP, or overall economic activity. We know this because they are spending more, and their confidence numbers are returning to historic levels.

Graph: Reuters-Inside Debt

The April consumer sentiment report is very strong, with the composite index at 84.1 versus the final March reading of 80.0. The latest reading is tied for the third best of the recovery, only 1.0 off from the recovery high of 85.1 in July last year. Perhaps the biggest plus in the report was the current conditions component, at 98.7 for a new recovery best and a very strong 3.0 points above March.

And April retail sales were as good—which is about ½ of personal consumption expenditures. Retail sales grew 1.1 percent in March after rebounding 0.7 percent in February (originally up 0.3 percent). Much of the latest advance came from motor vehicles which jumped 3.1 percent, following a 2.5 percent rebound in February. Excluding motor vehicles, sales increased a still healthy 0.7 percent, following a gain of 0.3 percent in February.

Graph: Econoday

The main reason for all this is the thaw in job creation, with the unemployment rate at 6.7 percent, 197,000 nonfarm payroll jobs created in March, and economists predicting even higher job growth ahead. And the manufacturing sector is growing again, after a winter pause.

"The March PMI^® registered 53.7 percent, an increase of 0.5 percentage point from February's reading of 53.2 percent, indicating expansion in manufacturing for the 10th consecutive month,” said Bradley J. Holcomb, chair of the Institute for Supply Management^® (ISM^®) Manufacturing Business Survey Committee.

The New Orders Index registered 55.1 percent, an increase of 0.6 percentage point from February's reading of 54.5 percent. The Production Index registered 55.9 percent, a substantial increase of 7.7 percentage points compared to February's reading of 48.2 percent. Employment grew for the ninth consecutive month, but at a lower rate by 1.2 percentage points, registering 51.1 percent compared to February's reading of 52.3 percent. Several comments from the panel reflect favorable demand and good business conditions, with some lingering concerns about the particularly adverse weather conditions across the country.

I still maintain that the housing market is the other sector that will boost employment this year. For instance, pending home sales rose 3.4 percent in March - the first gain in nine months - signaling that sales of existing homes may pick up, the National Association of Realtors reported Monday. The index of pending home sales hit 97.4 in March -- the highest reading since November -- compared with 94.2 in February.

"After a dismal winter, more buyers got an opportunity to look at homes last month and are beginning to make contract offers," said Lawrence Yun, NAR's chief economist. Despite March's gain, the gauge was down 7.9 percent from a year earlier. Low inventory, declining affordability and poor weather have hit the housing market in recent months.

There are other factors that boost consumer confidence, of course. But housing is the largest wealth-creator for middle class wage earners, so the wealth-effect from growing housing equity will boost their confidence as housing prices increase.

Harlan Green © 2014

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