Americans are feeling more chipper about the economy than they have in three years.
The Consumer Confidence Index rose to 70.4 this month, up from 64.8 in January, as Americans expressed more optimism about their income prospects and the direction the economy is headed, a private research group reported Tuesday.
It's the strongest reading since the early days of the most severe recession the U.S. has seen since the 1930s.
A robust stock market and falling unemployment are lifting Americans' spirits in spite of rising food and energy prices and a still-weak housing sector. In addition, a cut to the Social Security tax meant Americans started seeing more money in their paychecks in January, which may be boosting consumer spending.
Retailers including Macy's Inc., Home Depot Inc. and VF Corp., maker of Lee jeans and Vans shoes, reported better-than-expected earnings Tuesday. Home Depot posted its first annual revenue increase since before the housing crash in 2006, while Macy's, the country's second-largest department store chain, saw sales at stores open at least a year climb 4.3 percent.
"Since November there has been a gradual improvement in the consumer mood, but it's not happy days are here again," says Chris Christopher, an economist with IHS Global Insight. "Household net worth is still about $10 trillion below its peak, and with what's going on in the housing market now, it doesn't look like that's going to improve anytime soon."
The S&P/Case-Shiller index of home values in 20 U.S. cities fell 2.4 percent last year, the group said Tuesday, and economists predict foreclosures will increase this year.
The Conference Board, which puts out the confidence survey, found that the number of families planning to buy a home in the next six months fell to 4.4 percent in February from 5.2 percent in January.
While consumer confidence is rising, continued troubles in the housing market and other lingering effects of the recession are keeping the index well below the 90-plus readings that signal a stable economy. Confidence fell off a cliff after the U.S. housing bubble burst and the financial crisis took hold in 2007.
The index dropped below 90 in January 2008 and hit an all-time low of 25.3 a year later. While confidence and spending have inched back up as business conditions improve, Americans are still feeling cautious, especially when it comes to jobs.
Unemployment fell 0.4 percentage points in January after dropping the same amount in December, but the rate remains at 9 percent, historically high. That may be one reason consumers' assessment of current business and employment conditions improved only moderately in February.
Henry Snyder, a resident of Charleston, S.C., who recently completed a master's degree in school counseling, says job availability in his area remains limited, especially for young people. Many of his friends who are a few years out of college are still working the same low-paying jobs they took while students.
"They don't want to quit a job — any job — without some confidence they'll be able to get a new one," he said.
While Americans' assessment of current business conditions "remains rather weak," the Consumer Confidence Index is at a three-year high "due to growing optimism about the short-term future," says Lynn Franco, director of the Conference Board Consumer Research Center.
Consumers' short-term outlook has improved since January. The share of respondents who expected business conditions to improve over the next six months increased to 24.4 percent from 24.0 percent, while the number who expected business conditions to worsen declined.
"I'm definitely feeling better about how things are going," said David Liang of Manhattan. "With the stuff I pay attention to, unemployment isn't too bad and inflation is still pretty low. I don't have a car, so I'm not worried about gas prices."
As consumers' mindset improves, spending continues to go up. Retail sales rose 0.3 percent in January after rising 6.6 percent in 2010 over the prior year. During the 2010 holiday shopping season, sales increased at the fastest rate in six years, although spending growth slowed in January as a rash of severe winter storms across the nation kept people out of stores.
"We expect to see significant improvements in confidence over the course of this year," said Scott Hoyt, senior director of consumer economics for Moody's Analytics.
But Hoyt cautions against reading too much into this month's confidence survey. That's because the Conference Board recently started using a new data provider, and the February report is the first under the new system.
"We're not sure how much of the gain is real, so we're a little less excited than we otherwise would be," he said.