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U.S. confidence grows
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May 29, 2001: 11:05 a.m. ET
April savings rate falls as consumer spending outpaces rise in pay
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NEW YORK (CNNfn) - U.S. consumer confidence soared in May while personal spending rose faster than income in April, according to separate reports released Tuesday that showed hints of strength in the world's largest economy.
The Conference Board, based in New York, said its monthly index of consumer confidence rose to 115.5 in May from April's revised reading of 109.9. Wall Street economists polled by Briefing.com had forecast a reading of 111.
"The latest findings report rising confidence about job prospects (in) the next six months, but reveal growing concern about the current job market," said Lynn Franco, director of the Conference Board's Consumer Research Center.
"Nowhere, however, are there indications that consumers will curtail their spending, which points to continued economic growth," she said.
As if to highlight the confidence data, the Commerce Department reported consumer spending -- which accounts for about two-thirds of the nation's economy -- increased $28.9 billion, or 0.4 percent, in April. The number matched analyst forecasts and was about twice the revised 0.2 percent gain posted in March.
Meanwhile, U.S. income rose $24.2 billion in April, or 0.3 percent, matching forecasts, after rising 0.5 percent in March.
"We're still weak compared to where we were a year ago, but people are a little bit more optimistic about the future," said Gary Thayer, chief economist with A.G. Edwards & Sons Inc.
The markets yawned at the reports, with the Dow Jones industrial average up 23.88 points to 11,029.25 and the Nasdaq composite index falling 50.55 points to 2,200.48.
Prices lift spending number
In constant dollars, consumer spending rose only 0.2 percent in April, meaning about half the gain in spending was due to higher prices. There was no impact of higher prices in the revised rise in March spending.
Spending on durable goods fell 0.4 percent in April due to lower purchases of motor vehicles and parts. Purchases of non-durable goods gained 0.3 percent, compared with a 0.1 percent decline in March, while spending on services increased 0.2 percent, slowing from the 0.5 percent gain in March.
The nation's savings as a percentage of disposable personal income fell 0.7 percent in the month, compared with a 0.6 percent decline in March. Disposable personal income minus personal spending came to a negative $49.7 billion in April, compared with a negative $42.6 billion in March.
Consumers not as happy as they seem?
As the U.S. economy has slowed to a snail's pace, corporate earnings have fallen, leading to a tumble in U.S. equities markets and an alarming rise in job cuts.
Naturally, consumer confidence has suffered in this environment. The Federal Reserve has cut interest rates five times in 2001, slashing the federal funds rate to 4 percent from 6.5 percent in order to make money more accessible and encourage consumers to spend.
Tuesday's data would seem to indicate the Fed has done its job and that consumer confidence is on the mend. Some economists weren't so sure.
"The rise in (confidence) is presumably a reflection of the rebound in stock prices and -- though to a lesser extent -- the further cuts in interest rates," said Ian Shepherdson, chief economist at High Frequency Economics Ltd.
"As far as we can tell, confidence now seems to have run a bit ahead of the improvement in the stock market, and the failure of the Nasdaq and Dow to make further progress in recent weeks makes it doubtful that confidence will continue to rise at the May pace." Shepherdson said. "The sharp rise in unemployment is likely to become a negative factor, too."
Still, the Conference Board's survey was completed before Saturday's congressional approval of a $1.35 trillion, 10-year tax cut that President Bush intends to sign during the first week of June -- consumer confidence may be even stronger now.
"The more important development more recently was the tax cut that was enacted over the weekend, which will provide some pretty good support for consumer spending over the next few quarters," said Henry Willmore, chief U.S. economist with Barclays Capital.
The Conference Board's Present Situation Index, a gauge of consumer views of the economy right now, rose to 158.6 from 156.0 in April. The Expectations Index, which measures the outlook for the next six months, bounced to 86.8 in May from 79.1 in April. 
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