Consumer confidence up, but wallets remain shut

Even with unemployment still rising and home prices still slumping, Americans are getting their confidence back in the economy.

A widely watched barometer of confidence unexpectedly rose to the highest level since September, buoyed by an unexpected surge in the stock market, sparking hopes that the job market might turn around and the belief that the worst of the recession has passed.

But don't expect shoppers to buy expensive jeans and fancy furniture anytime soon.

"Consumers are not likely to spend just because they think things will get better," said Mark Vitner, senior economist at Wachovia. "They will actually have to see them get better."

Steve Marascia, a research analyst with Capitol Securities Management in Henrico County, said consumer spending accounts for about two-thirds of economic activity.

"So if hope for the U.S. economy is going to occur, it has got to start with consumer spending." he said. "The uptick in consumer confidence may portend well for such a scenario."

The Conference Board's Consumer Confidence Index's 14.1-point surge to 54.9, on the heels of a big gain in April, is encouraging. Economists surveyed by Thomson Reuters were expecting 42.3.

In February, confidence levels had hit a new historic low of 25.3.

May's confidence level is the highest since eight months ago, when it was 61.4.

The levels are also closer to last May's 58.1, though the widely watched barometer is still far from healthy. A reading above 90 means the economy is on solid footing. Above 100 signals strong growth.

Consumer confidence sank to 38.8 in October after the financial meltdown and stock market plunge, at that time the lowest level since The Conference Board started tracking the data.

It has fallen even lower since then. But the recent two-month stock rally has helped spur dramatic rebounds in April and May.

David A. Brat, chairman of the department of economics and business at Randolph-Macon College in Ashland, warned against reading too much good news into the consumer confidence numbers.

"We are up, but relative to falling off a cliff," he said. "The consumer, I think, is saying, 'I am staying in my home, hopefully I can keep my job, maybe I can refinance.' Maybe they feel a little bit like they are up and breathing. I don't think they feel positive yet, but maybe they feel the worst is over."

If the stock market makes another downward correction, consumer confidence could dip again, said J. Timothy Jester, a managing director of Capital Advisory Group, an investment advisory firm in Henrico. Housing prices also need to stabilize to maintain an upward trend.

"We do need to see another two months of consumer confidence continuing to stabilize before we are going to be firmly convinced that we have seen a real turn here," Jester said. "But we feel a heck of a lot better than in mid-March."

The confidence index is determined by a mail survey of a representative sample of 5,000 U.S. households from May 1 to May 19.

Much of the improvement in confidence came from the Expectations Index, which measures shoppers' outlook over the next six months. That barometer climbed to 72.3 from 51.0 in April. Consumers' assessment in the present situation, however, was still weak, rising to 28.9 from 25.5 last month.

It also showed that shoppers were less pessimistic about the job market, even though it remains grim.

As a testament to the economy's challenges, a closely monitored housing index also released yesterday showed that home prices fell at the sharpest rate ever in the first quarter, though the drop-off was worse at the beginning of the quarter.

The Standard & Poor's/Case-Shiller National Home Price index reported that home prices tumbled by 19.1 percent in the first quarter compared with the same quarter in 2008, the biggest year-over-year decline in its 21-year history. Home prices have fallen 32.2 percent since peaking in the second quarter of 2006 and have fallen to the levels seen at the end of 2002.

Staff writer John Reid Blackwell and The Associated Press contributed to this report.