Consumer Confidence Flies to 28-Year High

Americans’ confidence in the economy soared to a 28-year high in May as high employment levels and low inflation kept consumers upbeat about their financial outlook and fueled the continued recovery of the largest housing market in the country, according to a private survey.

Expectations for next year, though, are for slowing economic growth, a poll of national economists found.

Meanwhile, in California, confident consumers continued to aid the recovery of the critical residential real estate market, pushing the median home price up 2.1% in April from March to $181,400, according to the California Assn. of Realtors. Northern California continued to lead the state in price appreciation. The median home price in the San Francisco Bay Area, for example, hit an all-time high of $284,820 last month. The previous monthly high of $273,190 was set in August 1989.

California’s April home sales, on an annualized, seasonally adjusted basis, rose 0.6% from the previous month to 526,170 properties.

Separately, the National Assn. of Realtors reported Tuesday that sales of previously owned homes fell 2.4% in April, the second small monthly decline in a row. While sales of single-family homes slowed to a seasonally adjusted 4.06-million annual rate, that was not far below last May’s record high of a 4.28-million rate.

The Conference Board said its consumer confidence index rose from a revised 118.5 in April to 127.1 in May, a level not reached since August 1969, when it hit 131.7.

The 8.6-point jump in the confidence survey surpassed Wall Street economists’ predictions for a slight gain in May. The components measuring consumers’ estimation of their current and future situations also topped expectations for the month.

“For years, consumers have been plagued by job insecurity,” said Dan Seto, an economist at Nikko Securities International Co. “But we are seeing very strong employment conditions today and that’s creating a very favorable environment for consumers.”

Consumer sentiment is important because consumer spending accounts for two-thirds of the nation’s overall economic activity.

For months, economists have been scouring new financial data for signs of changes in the strength and direction of the economy, which has been expanding for more than six years.

In March, the Federal Reserve Board raised interest rates in a bid to prevent the economy from overheating and as a preemptive strike against a rebound in inflation. The Fed passed up a chance to raise rates again at a meeting last week, but investors are bracing for another increase.

“Strong consumer confidence and employment spells continued firmness on the growth front,” said Anthony Chan, vice president and chief economist at Banc One Investment Advisors in Columbus, Ohio. “Such evidence starts ruling out the possibility” the Fed won’t tighten rates again this year.

Interest rate fears, heightened by the consumer confidence figures, weighed down bond prices. Yields on 30-year Treasury bonds--a key influence on long-term consumer and business borrowing costs--rose above the troubling 7% level.

Stocks were lower in early trading Tuesday but erased those losses by midafternoon as investors instead focused on other recent data that showed a robust, noninflationary economy. The Dow Jones industrial average climbed 37.50 points to close at a record high of 7,383.41.

Separately Tuesday, one poll of 243 economists by the National Assn. of Business Economists showed that 84% expect some increase in interest rates by the Fed over the next six months.

But another poll by the trade group--this of 37 forecasters--predicted that slowing consumer consumption will reduce economic growth through the end of 1998. That should keep a lid on inflation but boost consumer prices by about 2.8% this year and next.

The survey of forecasters also said the nation’s unemployment rate, which dipped to a 23-year low of 4.9% in April, should average 5.2% this year and 5.4% in 1998.

In the Conference Board’s survey, consumers in May were more confident about current business conditions than they were in April and also said jobs were more plentiful in May. Seventeen percent said jobs were hard to find.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Existing-Home Sales

Seasonally adjusted annual rate, in millions of units:

April: 4.06

Source: National Assn. of Realtors

Consumer Confidence

From a monthly survey of 5,000 U.S. households. Index; 1985=100.

May: 127.1

Source: Conference Board