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Consumer confidence surges, factories, housing up

10:20 AM, Nov 2, 2012   |    comments
Al Bragalone looks at a bottle of gin as shoppers fill a new liquor aisle at a Costco warehouse store in Seattle. (Photo: Elaine Thompson, AP)
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WASHINGTON -- Americans' confidence in the economy surged last month to the highest level in nearly five years, as many were encouraged by an improving job market.

The Conference Board said Thursday that its consumer confidence index increased in October to 72.2. That's up from 70.3 in September and the highest reading since February 2008, two months into the Great Recession. Investors cheered the news.

Consumers were more confident after seeing better job growth, the report noted. Hiring in July and August was stronger than first thought, and employers added a modest 114,000 jobs in September, the government reported last month.

The survey is watched closely because consumer spending drives nearly 70% of economic activity. The reading is still below 90, a level that indicates a healthy economy. It last reached that level in December 2007. But the index is far above the all-time low of 25.3 touched in February 2009.

The gain in consumer confidence could be an encouraging sign for President Barack Obama, who faces re-election Tuesday at a time when the economy is the top issue for most voters.

The reported noted that consumers are more optimistic about both the economy and job market now and where it is headed in the next six months.

Consumers were "modestly more upbeat" about their finances and the outlook for the economy, said Lynn Franco, a Conference Board official. . They "appear to be in better spirits approaching the holiday season," she said.

Economists have cited some key reasons for why consumers have grown more confident in recent months. Stock prices are higher. Gasoline prices have leveled off after rising for several months. And a broad increase in home prices is likely giving would-be buyers more confidence. When prices rise, buyers don't worry so much that a home might lose value after they bought it.

Some economists question whether the higher level of confidence is sustainable. But others note that even a weak economy doesn't feel so bad to many consumers once it begins to make steady improvement.

Consumers' confidence might have been rattled by this week's Superstorm Sandy. Disruptions across U.S. industries will slow the economy temporarily, and some stores and restaurants will draw fewer customers. Some of those losses won't be made up.

U.S. manufacturing expanded for the second straight month in October, boosted by growth in new orders and production.

The Institute for Supply Management said Thursday that its index of factory activity rose last month to 51.7, up from September's reading of 51.5. A reading above 50 indicates expansion.

The ISM is a trade group of purchasing managers. Previous surveys showed manufacturing contracted from June through August.

The figure is slightly below the average for the year of 52.2. Other reports have suggested that manufacturing is slowing, hampered by less business investment and fewer exports. But the ISM survey points to continued, if gradual, expansion, driven by increased consumer spending.

The report is the final look at U.S. manufacturing conditions before Tuesday's presidential election. The race has been heavily focused on the economy.

Stocks jumped after the release of the October report, along with another report that showed consumer confidence surged last month to the highest level in nearly five years. The Dow Jones industrial average, which had already risen about 70 points after the opening bell, was up 139 points in morning trading.

The survey was completed before Hurricane Sandy disrupted business activity along the East Coast and cut power to millions of homes, an ISM spokesman said.
The details of the report showed that better consumer spending is helping some industries, while weaker business investment is slowing others.

The industries that reported rising new orders are oriented to consumers. Those industries include furniture, food and beverages, paper products and computer and electronics.

The industries reporting falling orders generally depend more on spending by U.S. and overseas businesses. Those industries included machinery, electrical equipment, steel and other metals, and chemical products.

Businesses have grown more cautious for several reasons. Many are nervous about the economic outlook overseas. Europe's financial crisis has pushed much of the region into recession. That has cut into U.S. exports and corporate profits.

Growth has also slowed in China, Brazil and other large developing countries.
Companies also fear large tax increases and big government spending cuts that will kick in next year if Congress fails to reach a budget deal to avert them.

Slowing business investment is weighing on economic growth. Company spending on equipment and software was flat this summer, the first quarter it failed to increase since the recession ended more than three years ago.

The economy grew at a 2% annual rate in the July-September quarter, up from 1.3 percent in the April-June quarter. Growth increased because of more consumer and government spending, although the rate is still too weak to rapidly spur job creation.

Finally, in a third report, the government said U.S. builders spent more on home construction in September, a gain that helped offset weakness in nonresidential building and government projects.

Construction spending grew 0.6% compared to August when spending had fallen 0.1%, the Commerce Department said Thursday.

The strength in September came from a 2.8% rise in home building. Spending on commercial projects such as office buildings and shopping centers fell 0.1% and spending on government projects was down 0.8 percent, the third monthly decline.

The September increase pushed construction spending to a seasonally adjusted annual rate of $851.6 billion, 14.1% higher than a 12-year low hit in February 2011.

But even with the gain, construction is at roughly half the level considered healthy.
Although new homes represent less than 20% of the housing sales market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to the National Association of Home Builders.

Home builders started work on new homes and apartments at the fastest pace in more than four years in September. They also requested the most building permits in four years, a sign that many are confident that recent gains in home sales will continue.

New home sales in September jumped to the highest annual pace in the past two and a half years. Sales of previously occupied homes dipped in September but have risen steadily in the past year.

Home prices rose in August compared to July in 19 of 20 major cities tracked by the Standard & Poor's/Case Shiller index. Prices were up nationally by 2% in August compared to August 2011, the third straight increase and faster than the July gain.

While the housing market has strengthened this year, the broader economy has lagged behind. The overall economy grew at an annual rate of 2% in the July to September period. That was an improvement from 1.3% growth in the April-June quarter but still too slow to make a significant improvement in unemployment.

The Federal Reserve in September said it would spend $40 billion a month to buy mortgage-backed securities to give a boost to home sales in hopes that it will support faster economic growth and stronger gains in the job market.

Associated Press

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