The US consumer, whose spending spree has been the engine of global growth in the past decade, expressed more confidence in the future than any forecaster predicted in a key survey out yesterday, as the Dow Jones Industrial Average closed above 13,000 for the first time in nearly four years.
The Conference Board consumer-confidence survey for February raised hopes that freefalling house prices and shaky business spending may not after all be a drag on the world's largest economy this year. The improving labour market and surging stock-market returns lay behind the improvement in sentiment, economists said.
Estimates for the latest consumer-confidence index ranged from 58 to almost 68, but the actual figure was 70.8, up from a revised 61.5 in January and the highest number since before the Japanese tsunami and Greek crisis last derailed recovery expectations a year ago.
Amna Asaf, economist at Capital Economics, said the improving sentiment was likely to be reflected in consumption growth and in first-quarter GDP, but cautioned that there was still a long way to go to heal the wounds of the credit crisis and recession.
"Even after the latest rally, the headline consumer-confidence index is still well below its long-run average of around 92 and with gasoline prices still rising it is possible that confidence could drop back in the coming months," she said.
Consumer spending accounts for 70 per cent of the US economy, and has been lacklustre since the recession, which sent unemployment spiking. Recent weekly benefit claims have fallen, however, and the official unemployment rate is now down to 8.3 per cent.
The Dow Jones, the most visible measure of the stock market, rose yesterday by 23.61 points to close at 13,005.12, its best level since May 2008 – before the worst of the subprime-mortgage market meltdown and the collapse of Lehman Brothers.
The housing market remains a significant problem for the economy, however. The Case-Shiller index showed prices in the 20 biggest metropolitan areas in December were down an average 4 per cent on the same month in 2010. The year-on-year rate of decline had speeded up; it was 3.9 per cent in December.
Federal Reserve governor Elizabeth Duke urged Congress to do more to help the housing market, including allowing more refinancing of mortgages guaranteed by the US government.