Stock averages on Tuesday extended the year’s explosive rally.
Further gains in consumer confidence could help the economy withstand the effects of higher taxes and federal spending cuts that kicked in this year. Spending by consumers drives about 70 percent of economic growth.
Consumer confidence jumped in May to 76.2, the Conference Board, a private research group, said Tuesday. That was up from a reading of 69 in April and is the highest level of confidence since February 2008, two months after the Great Recession officially began.
A separate report Tuesday showed that U.S. home prices jumped 11 percent in March compared with a year ago, the sharpest 12-month increase since April 2006. Prices rose year over year in all 20 cities in the Standard & Poor’s/Case Shiller home price index.
Surging stock prices and steady home-price increases have allowed Americans to regain the $16 trillion in wealth they lost to the Great Recession. Higher wealth tends to embolden people to spend more. Some economists have said the increase in home prices alone could boost consumer spending enough to offset a Social Security tax increase that’s reduced paychecks for most Americans this year.
Thomas Feltmate, an economist with TD Economics, says cheaper gas has also helped consumers shrug off the higher Social Security tax.
And the Conference Board survey said consumers are also more optimistic about the next six months. That should translate into greater consumer spending, substantial growth in hiring and faster economic growth in the second half of 2013, Feltmate said.
The economy has added an average of 208,000 jobs a month since November. That’s well above the monthly average of 138,000 during the previous six months. The job growth has helped reduce the unemployment rate to a four-year low of 7.5 percent.
The economy grew at an annual rate of 2.5 percent in the January-March quarter, up from a rate of just 0.4 percent in the October-December quarter. The fastest expansion in consumer spending in more than two years drove the economy’s growth.
Many economists think growth is slowing slightly in the April-June quarter to an annual rate between 2 percent and 2.5 percent. But many analysts say growth should strengthen in the second half of this year, boosted by the gains in housing and employment.
A key reason the Case Shiller index of home prices jumped in March was that a growing number of buyers were bidding on a tight supply of homes.
Prices rose in Phoenix by 22.5 percent over the past 12 months, the biggest gain among cities. It was followed by San Francisco (22.2 percent) and Las Vegas (20.6 percent).
“Rising home prices may begin to alleviate a lack of housing inventory ... by encouraging more homeowners to put their properties on the market,” Maninder Sibia, an economist with Economic Advisory Service, said in a research note. “The housing market is clearly improving.”
Builders are responding to the supply shortage by ramping up construction. Applications for building permits rose in April to the highest level in nearly five years. The supply of available homes jumped in April but was still 14 percent below its level a year earlier.
Stan Humphries, the chief economist at Zillow, a real estate data provider, says the increase in the Case-Shiller index has been skewed higher by cities such as Phoenix and San Francisco. Fewer homes are available in those areas because many homeowners still owe more on their mortgages than their homes are worth. That makes it difficult to sell.
Yet even excluding those markets, prices are rising steadily nationwide, Humphries said. The increases are “certainly confirmation that the housing market is experiencing a brisk recovery,” he adds.
Rising prices typically encourage more would-be buyers to purchase homes before prices rise further. They also enable more homeowners to sell homes by reducing the number of people who owe more on their mortgages than the homes are worth.
Prices have been rising steadily since last summer. Still, they’re about 29 percent below the peak reached in July 2006.
Banks have raised their credit standards since the housing bubble burst and are demanding larger down payments. That’s made it hard for some potential first-time buyers to get a mortgage.
One potential obstacle to further economic gains is that workers’ pay is rising only modestly. Without faster growth in pay, some consumers may be reluctant to keep spending more.
“If you don’t think your income is going up, you will not be exuberant in your spending,” notes Joel Naroff, chief economist at Naroff Economic Advisors.
Stronger hiring, though, would enable more people to spend freely. Naroff expects the pace of job creation to average between 175,000 and 200,000 a month for the rest of the year.
At that rate, the Federal Reserve might be inclined to slow its aggressive bond purchases – $85 billion a month in Treasury and mortgage bonds. The bond purchases have been intended to drive down long-term loan rates to encourage borrowing and spending.
Super-low rates have also helped fuel the stock rally. Still, some investors have grown nervous that that Fed might soon start to curtail its pace of bond purchases and that rates could creep up.