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May 25, 2010

Consumer confidence rises despite market upheaval

10:58am EDT
By John Parry
NEW YORK (Reuters) – Consumer confidence rose in May to its highest since March 2008, as an improving jobs outlook defied for now the growing fears about European debt market turmoil and threats to global growth.
While sentiment about the labor market improved, the U.S. housing market is looking vulnerable after the expiration in April of a home buyer’s tax credit.
An improving attitude about employment was key to consumers recovering their nerve, as a Conference Board report on Tuesday said fewer of those surveyed found jobs “hard to get.” Consumers account for more than two-thirds of U.S. economic growth.
As concerns about the labor market continued to ease, U.S. consumer confidence rose for the third-straight month in May, to 63.3, from a downwardly revised 57.7 in April.
The median of forecasts from analysts polled by Reuters was for a reading of 59.0 in May.
The apparent ebullience of the U.S. consumer contrasts with recent signs of consumer demand in Europe, which have been mixed.
Financial markets were little affected by the data, with worries about Europe’s banking sector the main focus. Treasuries prices rose and major U.S. stock indexes lost about 2 percent each.
The May consumer survey results showed Americans were little affected by the sharp sell-off in U.S. stocks earlier this month.
The Dow Jones industrial average on May 6 briefly fell nearly 1,000 points — its biggest-ever intraday point drop. The Conference Board survey’s cut-off date for the latest survey was May 18, and it is unclear how consumers have responded to the latest leg down in markets.
“It appears that consumers are focusing on the improvement in the labor market as an indication that things are getting better,” said Tom Simons, money market economist with Jefferies & Co in New York.
“Apparently they’re not paying too much attention to what’s going on in Europe,” he said. “Given what’s going on, the fact that confidence is continuing to improve shows that the U.S. consumer is very provincial and not sort of globally minded as to how they think the developments in Europe will affect corporations in the United States and their ability to hire workers.”
HOME PRICES FLAT
Housing, a cornerstone of the U.S. economy that crumbled in the credit crisis and contributed to the most protracted recession in decades, remains shaky, data showed.
Single-family home prices in 20 major cities were unchanged in March from February, but fell in the first quarter on renewed price pressure as federal aid faded away, Standard & Poor’s/Case Shiller home price indexes showed on Tuesday.
Prices have rebounded from lows hit during the crisis, yet the end of tax incentives for home buyers, combined with mounting foreclosures, suggests more weakness, S&P said.
For the first three months of the year, S&P’s national home price index fell 3.2 percent, unadjusted, compared with a 1 percent drop in the fourth quarter. The index was up 2 percent, however, from the same quarter a year ago.
The Federal Housing Finance Agency’s house price index for March, also released on Tuesday, showed prices for U.S. single-family homes rose a seasonally adjusted 0.3 percent after falling by a revised 0.4 percent, which was previously reported as an 0.2 percent dip. Home prices dropped 1.9 percent in the first three months of the year.
Problems in other major economies could weigh on the United States, analysts warn.
A worst-case scenario for the United States would be cascading sovereign debt defaults that spread into larger European economies beyond Spain.
U.S. bank exposure to the entire euro area is estimated at $1 trillion. Banks would clamp down on lending to protect their capital base. Goldman Sachs has estimated a “severe” credit crunch would take about 1.5 percentage points off of U.S. economic growth, potentially triggering a double dip recession.
After the worst recession in 70 years, the health of the economy is a key issue for American voters in the run-up to congressional elections in November that are expected to be rough on the Democrats and on many incumbent politicians.
(Reporting by Lynn Adler, Emily Flitter, Emily Kaiser and Wanfeng Zhou; Writing by John Parry; Editing by Padraic Cassidy)

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