U.S. Economy: Confidence Increases, Leading Index Declines

U.S. Economy: Confidence Increases, Leading Index Declines


Jan. 18 (Bloomberg) -- Confidence among U.S. consumers rose in January as gasoline prices fell, while a measure of the economy's direction over the next three to six months declined.

The improvement in consumer sentiment is at odds with comments by Federal Reserve Chairman Ben S. Bernanke, who said yesterday that risks to economic growth are ``more pronounced.'' Richmond Fed President Jeffrey Lacker said today that growth is ``very weak'' and may warrant additional interest-rate cuts.

The Reuters/University of Michigan preliminary index of consumer sentiment climbed to 80.5, from December's 75.5 reading that was the lowest since 2005. At the same time, the Conference Board reported its index of leading economic indicators dropped 0.2 percent in December, the third consecutive drop.

``The outlook is still very bleak,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. He said the final Michigan index for the month ``may not look quite as good.''

The confidence index was forecast to fall to 74.5, according to the median of 65 economists surveyed by Bloomberg News. The monthly figure averaged 86.1 last year, down from an average of 87.6 in 2006 and has weakened in six of the past seven years since peaking at 112 in January 2000.

Stocks extended gains after the University of Michigan report was published, before reversing the advance. Stocks had risen after General Electric Co. said fourth-quarter profit rose 15 percent, buoyed by earnings from international sales.

Gasoline Relationship

Since the start of the fourth quarter, the sentiment index has tended to fluctuate in the opposite direction of gasoline prices, according to data compiled by Bloomberg. The correlation in the period was minus 0.76.

Retail gasoline prices, up about 40 percent from a year ago, have dropped about 20 cents a gallon from a peak in May of $3.21, according to the most recent figures from AAA. Prices dropped 3.4 cents in December.

The improvement in confidence was driven mainly by two groups, the report said. Households making less than $50,000 a year said bigger discounts made this a good time to buy durable goods like televisions and automobiles, while upper-income households cited an improving outlook on the economy. In addition, more people than at any time since 2001 said interest rates will drop.

Consumer Expectations

The sentiment gauge's expectations index, which some economists view as an indicator of future consumer spending, increased to 69.1 from 65.6 in December.

A measure of current conditions, which reflects Americans' perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, gained to 98.1 from 91.

The Fed may cut the benchmark interest rate by a half percentage point this month to help the economy avoid a recession, according to futures trading.

The housing recession is now in its third year and the job market is slowing. Employers added 18,000 workers in December, the lowest gain since 2004, and the unemployment rate jumped to 5 percent, according to government figures.

Consumers are becoming more careful about spending. California Pizza Kitchen Inc., the owner of the casual-dining chain of the same name, this week said quarterly profit missed the company's forecast and lowered its earnings outlook for 2008.

Discounting

Discounts are helping other companies. Wal-Mart Stores Inc., the world's largest retailer, said its December sales rose 2.4 percent, the most in four months, after it lured shoppers with price cuts on more holiday items.

Combined with gross domestic product, the Conference Board's leading indicators are used by the seven-member committee within the National Bureau of Economic Research in Cambridge, Massachusetts, to determine when economic downturns start and end.

Pending revisions, last month's rise in the coincident index signals a recession probably didn't start last month.

``The latest data suggest that growth could remain slow, and possibly be a little slower, in the first half of 2008,'' Ken Goldstein, a labor economist at the Conference Board, said in a statement.

Over the last six months, the leading indicators index dropped at an annual pace of 1.6 percent, short of the approximate 4 percent to 4.5 percent drop Conference Board economists say signals recession.

The report bears out forecasts by most economists that the U.S. will be able to skirt recession. The world's largest economy is projected to grow at a 1.1 percent annual rate this quarter and pick up speed in the following three months, according to the median forecast of economists surveyed earlier this month.

BLOOMBERG