U.S. Consumer Confidence Jumps Again in May; Home Prices Increase Further in March

• US consumer confidence jumped 7.2 points to a five-year high of 76.2 in May 2013, handily beating market expectations for a reading of 69.5.
• The current employment differential improved to a five-month high of -25.3 from -27.2 in April as consumers became less pessimistic about labour market conditions.
• The continued improvement in consumer sentiment in May bodes well for household spending to maintain its underlying momentum during the second quarter of 2013 despite the headwinds from the fiscal measures implemented in the first three months of this year. We expect that real personal consumer expenditure will moderate in the second quarter to closer to 2% from the fairly robust annualized 3.2% increase recorded in first quarter; however, as labour market conditions continue to improve and household balance sheets benefit from rising home prices, spending should accelerate in the second half of the year and provide a key support to the ongoing expansion of the US economy.
• In a separate release this morning, the seasonally adjusted S&P/Case-Shiller 20-City Composite measure of US home prices rose 1.1% in March 2013. The annual pace of increase in the unadjusted index picked up to 10.9% from 9.4% in February.

The Conference Board’s measure of US consumer confidence jumped 7.2 points to 76.2 in May (well above expectations for a 69.5 reading) to build on the previous month’s 7.1 points gain to an upwardly revised 69.0 level in April (initially reported as 68.1) and reached its highest level since February 2008. The improvement in sentiment in May reflected more optimistic appraisals of both present conditions and the short-term outlook. The “expectations for six months hence” component surged 8.1 points to 82.4, which was its best reading since October, while the “present situation” component jumped 5.7 points to 66.7, which was its highest level since May 2008.

With respect to labour market conditions, those saying jobs were “plentiful” rose to a five-month high of 10.8% from 9.7% in April while those saying jobs were “hard to get” fell to 36.1% from 36.9% in the previous month. The net result was that the labour market differential (the difference between these two components) improved to a five-month high of -25.3 in May from -27.2 in the previous month.

The continued improvement in consumer sentiment in May bodes well for household spending to maintain its underlying momentum during the second quarter of 2013 despite the headwinds from the fiscal measures implemented in the first three months of this year (namely the payroll tax increase in January and the forced government spending cuts in March). We expect that real personal consumer expenditure will moderate in the second quarter of 2013 to closer to 2% from the fairly robust annualized 3.2% increase recorded in the first quarter; however, as labour market conditions continue to improve and household balance sheets benefit from rising home prices, spending should accelerate in the second half of the year and provide a key support to the ongoing expansion of the US economy.

In a separate release this morning, the seasonally adjusted S&P/Case-Shiller 20-City Composite US home price index rose 1.1% on a month-over-month basis in March, thereby beating market expectations for a modest 0.9% gain. While still well below its pre-recession levels, the measure is now up 11% from its January 2012 trough and sits at its highest level since November 2008. The unadjusted index rose 10.9% on a year-over-year basis in March, accelerating from the 9.4% gain in the previous month and marking the highest rate of increase since April 2006.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

To subscribe or visit go to:  http://www.riskcenter.com

http://riskcenter.com/articles/story/view_story?story=99915415