2 key gauges rise strongly Consumer confidence, home resales reveal surprising vigor

November 26, 1997|By BLOOMBERG NEWS

WASHINGTON -- U.S. consumer confidence advanced unexpectedly and home resales surged to a record, suggesting that the economy could end the year on an unexpected high note, reports yesterday showed.

The Conference Board's consumer confidence index rose to 128.3 in November, the third-highest reading this year. October's index, meantime, was revised up to 123.4 from an original estimate of 123.3. A comparable index from the University of Michigan also registered a gain this month, rising to 107.2 from 105.6 in October.

Sales of existing homes climbed in October for the third straight month, rising 2.1 percent to a record annual rate of 4.40 million after holding steady in September, according to the National Association of Realtors (NAR).

Against a backdrop of the nation's lowest unemployment rate in a quarter century, "consumers are feeling pretty flush as the holiday season approaches," said Bill Cheney, an economist at John Hancock in Boston. "The Fed must be feeling increasing pressure to stay ahead of the curve, but they also don't want to play the Grinch before Christmas."

Government bonds rose after the reports, though some analysts cautioned that Federal Reserve policy-makers could decide that growth is still too vigorous and may consider raising the overnight bank lending rate to prevent inflation from accelerating. Consumer spending accounts for two-thirds of economic growth, with houses ranking among the largest purchases.

In its report yesterday, the Conference Board also said an index gauging consumer expectations for the next six months rose to 107.9 in November from 107.3 during October. And an index tracking consumers' assessment of present conditions increased to 158.9 from 147.5 -- the highest reading since 1969, according to the New York-based research group.

"Recent turmoil on Wall Street and world financial markets, along with continuing layoff announcements, have not dampened consumer confidence," said Lynn Franco, a Conference Board researcher. "Consumers continue to express confidence about the health of the U.S. economy and expect these favorable conditions to continue well into 1998."

That could bode well for retailers. Sales during the holiday shopping season, which begins Friday, are expected to rise between 3.8 percent and 5 percent, analysts said. "I can't see anything on the economic horizon that would keep this shopping season from being a strong one," said Mark Vitner, an economist at First Union Corp. in Charlotte, N.C., who expects a 4.5 percent increase.

Consumer confidence readings aren't foolproof -- and can provide a false reading on the course of the economy. During the first half of 1990, for example, confidence signals remained strong until Iraq invaded Kuwait in August, triggering an oil crisis that contributed to the last U.S. recession.

"Common sense almost dictates a decline in confidence" if another bout of turmoil sweeps Wall Street or if fallout from Asia's economic crisis spills into the United States, said Nick Perna, chief economist at Fleet Financial Group in Hartford, Conn.

The Conference Board's index uses 1985 as a base year of 100. About 5,000 households are surveyed on their attitudes toward business conditions, jobs and their paychecks. Economists and

investors watch the index because high confidence readings traditionally mean that consumers feel secure enough to spend money and propel the economy.

The housing report showed resales rising 6.6 percent in the Midwest and 6.5 percent in the West. Resales were unchanged in the South and fell 4.5 percent in the Northeast. Those figures represent actual closings, which lag behind contract signings by a few months.

"We have been surprised at the strength of the housing market all year, and, with record levels over the last two months, sales were expected to ease slightly," said NAR President Layne Morrill. "Clearly, the high level of consumer confidence in a strong economy with low interest rates is bringing more people into the market than many expected."

Home resales make up about 85 percent of all U.S. single-family home sales. In September, sales were unchanged from August's 4.31 million annual pace, the NAR reported, down from the 4.32 million pace previously reported for September.

Pub Date: 11/26/97

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