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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.
"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."
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 prompted last week's Money Morning "Question of the Week": Is your household spending more this year? Are there things like clothes, vacations or food that you plan to spend more on than in years' past? Or are you still worried about the economy and your income, and clamping down on your spending habits? Do you see signs of consumer optimism and increased spending in your city?
Reader responses conveyed a lack of consumer confidence, despite the optimistic reports. The following comments illustrate readers' concern for increasing prices and how more expensive goods will affect their households' savings.
Saving More, Cutting Back
We started spending a lot, after getting raises at the beginning of the year, but now have cut back again. We noticed food going up and are thinking gas prices will follow, so we are trying to save more.
I'll definitely be more likely to splurge this year than last year, and might even treat myself to an iPad. But that's if food and gas don't go too much higher. Otherwise, it's hard to justify the luxuries.
- Andy B.
As prices go up, I cut back a bit to match.
- Alan W.
I'm definitely worried about where prices are headed. I was feeling a little better financially, but still not 100% confident. I think my job is pretty safe, which helps. But I'm rethinking vacations and nights out that I used to think I'd be able to afford this year.
I'm hoping living frugally one more year will make a difference in our household savings.
- Louise M.
Can't Afford It
No, less household spending in 2011, because of higher gas prices, higher inflation, etc.
Spending More - Sadly
I'm spending way more because of higher prices! This is BS!
- Nathan O.
Yeah I'm spending more - because I have to! It seems everything has gone up lately to the point I hate going to the grocery store. Is there no end in sight?
I don't even want to think about what I'll pay at the pump this summer, if it's as bad everyone says it'll be $5.00 a gallon, could it be?
- Pat D.
Spending more, but stocking up in preparation for higher prices.
- David P.
Be sure to answer next week's question: Are you betting on a bull market?
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News and Related Story Links:
- Bloomberg News:
U.S. Consumer Confidence Increases to Three-Year High
- The Wall Street Journal:
Consumer Confidence Rises
U.S. Stocks Trim Losses After Consumer Confidence Tops Forecasts
Consumer confidence jumps in February
- Money Morning News Archive:
Question of the Week Feature