Consumer behavior shows recession is over

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- Economists have been saying for a while that the Great Recession has ended. Now, there are signs that the general public is finally starting to agree.

Though still pitifully low, consumer confidence is improving.

But some of the positive economic news of recent weeks, like the best job gains in three years, the continued stock market rally and early signs of a turnaround in home values, is starting to make people more hopeful.

It's a growing optimism that can best be seen in consumers' actions, not their answers to various polls.

"If you look at what they're saying, they're still very nervous," said Mark Zandi, chief economist at Moody's Economy.com. "But if you look at what they're doing, they're more convinced that things have turned the corner."

Voting with their wallets

Consumer spending is improving at a faster pace than many had expected at this stage in the recovery.

The savings rate, which soared last year when people were afraid they'd lose their jobs and homes, has started to decline.

"That's an indication of increased confidence," said Keith Hembre, chief economist at First American Funds.

And home prices appear to be stabilizing too. With three quarters of month-over-month gains, according to S&P/Case-Shiller. Although prices lower than they were a year ago, the free fall seems to have ended.

"I think people are coming to the conclusion the worst is pretty close to over in the housing market," said Zandi.

A key retail sales report on Thursday is expected to show that chain-store sales grew at a 6% rate in March. That would be the best increase in three years.

And auto sales are also improving, with almost all automakers posting double-digit percentage gains in March.

Jobs mean confidence

While the jobs picture is still gloomy, there are signs of improvement there too.

Unemployment remains close to 10%, with few forecasts of large decreases anytime soon. Those who are out of work have been looking for a job for almost eight months on average, a record duration for long-term unemployment.

But the number of discouraged unemployed workers who had dropped out of the labor market fell by more than 200,000 last month, as they began looking for jobs again.

"That's a sign of greater confidence in what is going on," said Zandi.

And while the closely-followed reading of employer payrolls show only modest job gains, the number of Americans surveyed by the Labor Department who say they now have work has shot up by 1.1 million this year.

Some economists believe that means the labor market is quietly getting stronger than the headline numbers suggest.

"Firings are clearly down, jobless claims are way off their peak, and we did see reasonably strong employment numbers in March," said Hembre.

Why consumers matter

How consumers feel about the economy is important, said Hembre. If they are confident that the worst is behind them and they're not worried about losing their jobs or homes, then they'll be more willing to spend.

That can lift economic activity faster than forecasts, even if unemployment remains near 10% and tight credit continues to be a headwind for spending.

The latest Conference Board consumer survey finds that 43% believe the current conditions are still bad, while less than 9% believe they are good. But almost half now believe conditions are normal.

"The broad consumer confidence indexes are still pretty depressed, but they're well off their lows," Hembre said. "There's definitely a self-reinforcing dynamic that will mean we'll have a sustained recovery."

So even though there is still a lot of justified nervousness about the strength of the economic recovery, there's more confidence on Main Street, and not just in economic forecasts, that the worst is behind us. And that's good news for future growth.

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