Consumers Wary of Spending as Prices Rice

Despite renewed consumer confidence, many economists worry consumers will hold back spending due to concerns over rising prices and an average gasoline price that is expected to top …

Despite renewed consumer confidence, many economists worry consumers will hold back spending due to concerns over rising prices and an average gasoline price that is expected to top $4.00 per gallon this summer. This could be problematic for an economic recovery driven by consumer spending. See the following article from Money Morning for more on this. 

Following the crippling economic turmoil of the past few years, many U.S. households worked hard to tighten budgets, slash excessive spending, and live within their means.

But there are signs that consumers are starting to open their wallets again, and U.S. consumer spending – which makes up 70% of the economy – could help sustain the cautious economic recovery.

U.S. consumer confidence in February hit its highest level in three years, bolstered by economic optimism and salary increases, spurring hope that 2011 could be a year of increased household spending.

The Confidence Board, a private research group, said its consumer confidence index climbed to 70.4 last month from 64.8 in January, beating expectations of 66 from economists in a Dow Jones Newswires survey. The present-situation index, which measures consumers’ sentiment of current economic conditions, rose to 33.4 from 31.1, its fifth consecutive increase.

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"The consumer believes that growth is picking up pace," Jonathan Basile, senior economist at Credit Suisse Group AG (NYSE ADR: CS), told Bloomberg News. "The ducks are in a row for stronger consumer spending this year."

More Americans also felt optimistic about seeing increases in their income over the next six months, which improves the likelihood that household spending will pick up enough to give retailers a needed boost.

While some economists said the increasing confidence will continue, they acknowledge consumers have some strong economic concerns ahead.

"[The index] suggests that the recent sustained gains in consumer spending have been underpinned by a recovery in confidence towards the economic rebound and outlook," Millan Mulraine, a TD Securities economist, wrote in a research note. "However, with the labor market recovery continuing to be quite weak, and rising gasoline prices likely to become a significant source of drag on households’ budgets, the improvement in confidence is likely to struggle to gain traction in the coming months."

Many economists and consumers expect the nation’s average gasoline price to hit $4.00 per gallon this summer.

And there are some who think economic threats will make 2011 a dim economic year, despite these signs of optimism, and are keeping their household spending to a minimum. A consumer confidence study by Bloomberg reported 29% of respondents expect the economy to worsen this year, up from 23% in January.

"Overall, it is encouraging that consumers are becoming more upbeat," Paul Dales, senior U.S. economist with Capital Economics, wrote in a research note. "But we remain concerned that later this year the poor state of households’ balance sheets will undermine the recent acceleration in economic growth."

This article was republished with permission by Money Morning.

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