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Consumer Confidence at 6-Year High in August

Economy: Surge could give Fed more reason to raise rates, analysts say.

August 28, 1996|From Times Wire Services

Consumer confidence in the U.S. economy unexpectedly strengthened in August, reaching its highest level in more than six years, according to a key economic barometer released Tuesday.

Economists, who had been expecting a decline in the Conference Board's survey, said news of the optimism could give the Federal Reserve Board more reason to raise interest rates by year-end.

"It's not going to be the straw that broke the camel's back, but it's another piece of anecdotal evidence that maybe the economy isn't slowing as much as the markets and the Fed may have hoped for," said Kevin Flanagan, a money market economist with Dean Witter Reynolds Inc.

The Conference Board, a private business research group based in New York, said its consumer confidence index rose 2.4 points to 109.4 this month. Most economists had expected a decline to about 105.

Consumer optimism was widespread. Using an average of the last three months and comparing it with the same period last year, the Conference Board said the biggest gains were on the West Coast, followed by New England. The only decline during the period was in the Rocky Mountain region, though optimism continues there at high levels.

The overall increase, especially surprising after a sharp 7-point gain in July, indicates consumer sentiment may be "on an upward trend after remaining stagnant for more than a year," said Lynn Franco, associate director of the Conference Board's Consumer Research Center.

The rise in optimism initially jolted the Treasury market, sending bond prices sharply lower on a day that lacked other major economic releases. The long bond's yield fell to 6.97% from 7.00%. Stocks closed slightly higher.

Although consumer spending accounts for about two-thirds of the nation's economy, economists stressed that it remains to be seen whether consumers take their optimism to the stores.

However, the statistics reinforced recent reports of strength in the job market, retail sales and housing. Economists said the rosy consumer outlook, if confirmed by further signs of vigor, could derail a predicted slowdown in the second half of the year.

That, in turn, could prompt the Fed to raise interest rates as early as its next policy-setting meeting, on Sept. 24, as a way to keep the economy from growing at an inflationary pace.

Indeed, central bankers said at a meeting early in July, when they left rates unchanged, that they expected robust second-quarter economic growth to "slow appreciably over the second half of the year." The minutes of the meeting were released Friday. Fed policymakers also voted to hold the line on rates at their Aug. 20 meeting.

The Conference Board reported that consumers' opinions of current business conditions rose 2 points and that their expectations for the next six months climbed 3 points.

They were the highest confidence levels about current and future business conditions since the index, a composite of the two measures, hit 110.6 points in March 1990.

The Conference Board said slightly more families described current business conditions as good in August than in July. Slightly fewer consumers this month expected conditions to deteriorate compared with July.

But consumers were not as sure about the employment outlook. Slightly more said jobs were difficult to find, but a bit more respondents expected more jobs to become available in the next six months.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Consumer Confidence

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

1996: August: 109.4

Source: Conference Board

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