Offering further evidence that the U.S. economy’s tentative rebound is gaining traction, separate reports Tuesday showed consumer confidence jumped sharply in the latest month while February orders for big-ticket manufactured goods topped expectations.
Most investors and economists focused on the much-stronger-than-expected consumer confidence data released Tuesday by the Conference Board. The New York business group reported that its closely watched consumer confidence index climbed a full 15.2 points to 110.2 in March, up from 95.0 in the previous month.
“Confidence not only rebounded in March, it soared,” John Hancock Financial Services analyst Oscar Gonzalez said. Analysts had expected the index would rise to about 97 or 98.
Indeed, the Conference Board said one of the two components of its survey–in which the 5,000 households surveyed assess their current expectations–had recorded its biggest one-month upturn in 25 years. The future expectations component, which measures consumer guesses about the economy’s health six months from now, showed its biggest monthly increase in nearly a decade.
It’s unusual for both components of the survey to move upward in lockstep: “The fact that both the present situation and future expectations components surged in March suggests that–in addition to economists–consumers now believe the recession is over, too,” said Mark Vitner, an economist with Wachovia Securities.
Consumer confidence is considered a crucial economic barometer because people tend to spend more freely when they are feeling optimistic, and to alternatively hold on to their wallets when they are worried about their jobs or the health of the economy.
The “striking” gains in the March index make it clear that “consumers’ confidence has been bolstered by the improvement in business and labor market conditions,” said Lynn Franco, director of the Conference Board’s research arm.
But a number of experts cautioned that, even though a return of consumer confidence to near its August level certainly bodes well for the economy, the rebound now under way remains fragile.
Vehicle sales only weak note
The only weak spot in the confidence data, said Wachovia’s Vitner, was the drop in consumers’ plans to buy new vehicles. That decline, to the lowest level in more than four years, “probably reflects the much-anticipated payback from last fall’s zero-percent financing programs” the economist said.
Automakers boosted sales late last yearthrough the use of extremely attractive promotional pricing.
In comparison with earlier recessions, consumer spending and the crucial housing market have held up fairly well during the recession, said to have begun last March. Because those key drivers have less upside to recover, many experts think this rebound will have less vigor than earlier economic recoveries have demonstrated.
As Federal Reserve Chairman Alan Greenspan recently emphasized, it’s also not yet clear whether the surprisingly positive economic data that have emerged over the past several weeks are evidence of a sustainable trend, or of a short-term strengthening as a result of manufacturers cautiously building up their inventories.
“The key issue that the Fed is focusing on is whether the initial strength in the economy due to inventory rebuilding will broaden into stronger consumer spending,”said Banc One Capital Markets economist Dana Johnson. The Conference Board report, he added, “by no means settles the issue.”
Still, Johnson said, “obviously, consumers are feeling better about the economy, which in all likelihood will be reflected in stronger spending trends in the weeks and months ahead.”
To revive the flagging economy, the Federal Reserve cut interest rates eleven times last year, bringing the cost of borrowing to a 40-year low; the Fed is expected to begin increasing rates later this year.
Orders for durables up 1.5%
Separately Tuesday, in what economist Mark Zandi of Economy.com called “another sign that the economy has made the transition from recession to recovery,” the Commerce Department said that orders for durable goods, such as machinery and major appliances, rose 1.5 percent last month.
February marked the third consecutive month that durable-goods orders have strengthened, and the magnitude of the increase easily exceeded the 1.0 percent expansion experts had been anticipating. The “advance” order results released will be revised in coming months.
The gains were also less robust than they appear at first glance: The latest figures benefited from strong orders for aircraft, which vary widely from one period to the next. Excluding the chronically volatile transportation group, orders were actually down 1.3 percent. The underlying trend of recent months’ orders is up, said Banc One’s Johnson, but at a rate that he considers to be “consistent with a subpar rather than an energetic recovery.”
In an address to the National Association for Business Economics Tuesday, William McDonough, president of the Federal Reserve Bank of New York, dampened concerns that the Fed plans an aggressive rate-hike effort later in 2002: “The pre-conditions for recovery are in place,” he told the group, before adding that “continued slack in the economy and the strong dollar should prevent inflation from rising anytime soon.”
