March 28, 2017 / 1:11 PM / 5 months ago

Consumer confidence hits 16-year high in boost to economy

A woman shops at The Grove mall in Los Angeles November 26, 2013.Lucy Nicholson

WASHINGTON (Reuters) - U.S. consumer confidence surged to a more than 16-year high in March amid growing labor market optimism while the goods trade deficit narrowed sharply in February, indicating the economy was regaining momentum after faltering at the start of the year.

The economy's strengthening fundamentals were underscored by other data on Tuesday showing further increases in house prices in January. Robust consumer confidence and rising household wealth from the home price gains suggest a recent slowdown in consumer spending, which has hurt growth, is likely temporary.

"We think that real consumption will firm moving forward," said Daniel Silver, an economist at JP Morgan in New York.

"It looks likely that the recent spending data were held down by some temporary factors related to unusually mild weather and a delay in tax refund issuance."

The Conference Board said its consumer confidence index jumped 9.5 points to 125.6 this month, the highest reading since December 2000. Consumers' assessment of both current business and labor market conditions improved sharply in March.

They also anticipated an increase in their incomes. The survey's so-called labor market differential, derived from data about respondents who think jobs are hard to get and those who think jobs are plentiful, was the strongest since 2001.

This measure closely correlates to the unemployment rate in the Labor Department's employment report. It is consistent with continued reduction in slack in the labor market, which is near full employment.

The dollar rose against a basket of currencies, while prices for U.S. government bonds fell slightly. Stocks on Wall Street were trading higher, with Dow Jones industrial average .DJI on track to snap an eight-day losing streak.

Both consumer and business confidence have surged in the wake of Donald Trump's victory in last November's presidential election. The Trump administration has pledged to pursue business friendly policies, including tax cuts and deregulation.

The Conference Board said the cutoff date for the survey results was March 16. This was a week before Republicans in the House of Representatives failed to pass health legislation to repeal the Affordable Care Act, a stunning political setback for Trump.

The failure to push through legislation to overhaul the health care system stirred concerns in markets about the difficulties Trump may have in implementing other policies, including tax reform.

"The question then is whether or not consumers will remain upbeat if legislation stalls," said Jim Baird, chief investment officer for Plante Moran Financial Advisors in Kalamazoo, Michigan. "At some point, those hopes for a stronger economy will fade if legislative victories remain elusive."

Homes are seen for sale in the northwest area of Portland, Oregon March 20, 2014.Steve Dipaola

JOBS BOOSTING CONFIDENCE

While other economists expected a pull back in confidence in April, they said household optimism was being driven by the labor market's health and not Trump's promises. Labor market strength could encourage the Federal Reserve to raise interest rates again in June, they said.

"Recovery is what the survey indicates and, more to the point, the answers on jobs and income are rooted in current experience not expectations for what Trump will or won't do," said Steven Blitz, chief U.S. economist at TS Lombard.

"If reality pans out as consumers and we expect, the Fed has three more hikes to go before the year is done."

The Fed raised rates a quarter percentage point at two of its last three meetings, most recently earlier in March. The survey showed increases in consumers planning to buy cars and major appliances. There was, however, a drop in intentions to purchase a home after recent strong gains.

Separately, the Commerce Department said in its advance economic indicators report the goods deficit fell 5.9 percent to $64.8 billion last month as imports and exports fell. It also said inventories at retailers and wholesalers both rose 0.4 percent last month.

The data prompted economists at Barclays to raise their first-quarter gross domestic product estimate by four-tenths of a percentage point to a 1.6 percent annualized rate.

Morgan Stanley lifted its forecast to a 1.5 percent pace from a 1.0 percent rate.

"The recent widening, in our view, reflected the stabilization and rise in energy prices, as some of the improvement in nominal goods imports reflects petroleum," said Michael Gapen, chief economist at Barclays in New York. "In addition, we think the widening in the trade deficit reflected the end of the multi-year industrial recession in the U.S."

A third report showed the S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rose 5.7 percent in January on a year-over-year basis after increasing 5.5 percent in December. House prices are being driven by tight inventories.

Economists expect further price gains despite rising mortgage rates.

"Very tight market conditions suggest that price growth will continue at similar rates for the rest of this year, as rising earnings and high levels of confidence support housing demand even as mortgage interest rates rise," said Matthew Pointon, property economist at Capital Economics in New York.

Reporting by Lucia Mutikani; additional reporting by Dan Burns in New York; Editing by Chizu Nomiyama

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