Consumer confidence rises to highest point since September

NEW YORK -- 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, hopes that the job market might turn around and the belief that the worst of the recession is over.

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."

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

Meanwhile, Americans are grappling with an unemployment rate that's expected to climb to 9.2 percent in May, up from 8.9 percent, as companies lay off more workers.

That has helped push shoppers to keep shopping at discount stores and cutting back on nonessentials.

Cheri Radke, 52, of Waukesha, Wis., said she buys more food, makeup and other necessities at Wal-Mart and shops sales at Target. Radke works in a bank and has been scared by seeing people cash more unemployment checks, so she's trying to be frugal.

"More on a need basis, less than a want," she said of her shopping habits. "I'm trying to be more cost-conscious."

Still, the Conference Board's Consumer Confidence Index's 14.1-point increase to 54.9, following another 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.

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

Investors focused on the upbeat sentiment reading, shaking off the downbeat report on the housing market. In early afternoon trading, the Dow rose 200.24, or 2.4 percent, to 8,477.56.

The confidence report offered encouraging news to merchants, after confidence plummeted to historic lows late last year.

Consumer confidence sank to 38.8 in October after the financial meltdown and stock market plunge, at that time 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.

Meanwhile, better-than-expected earnings results from such retailers as Sears Holdings Corp. and Gap Inc. have offered some evidence that spending has begun to stabilize, with sales declines moderating.

Still, the retail business overall is weak, and economists don't expect to see any modest recovery in spending until later this year. Vitner believes it will be another year before merchants enjoy strong spending growth.

While Gary Thayer, chief economist at Wells Fargo Advisors, was encouraged by May's confidence report, he noted that confidence still has a way to go before shoppers go back to splurging. That can only happen when the job and housing markets start to turn around.

The Standard & Poor's/Case-Shiller National Home Price index reported Tuesday 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.