Consumer Confidence Index at 7-Year High

Americans’ confidence in the U.S. economy surged to a seven-year high in December and new home sales posted a larger-than-expected gain in November, according to two reports released Tuesday that offered further signs the six-year economic expansion will continue in the new year.

The Conference Board, a business research group, said its monthly consumer confidence index rose 4.3 points in December to 113.8, its highest level since November 1989, when it reached 115.1.

Separately, the Commerce Department reported new home sales surged 14.2% in November, the steepest advance in 3 1/2 years.

Both reports were well above economists’ expectations.

“Consumers in general are feeling pretty good about the state of the economy,” said Gary Thayer, a senior economist at A.G. Edwards & Sons Inc. in St. Louis. “That means we should head into next year in pretty good shape.”

While the reports pointed toward a healthy U.S. economy, financial markets weakened on the news, disappointed by the surprising strength and worried that substantial growth could spur inflationary pressures. The Dow Jones industrial average fell 101 points to close 1996 with its worst slide in six months, and bond prices fell sharply, pushing yields up dramatically.

“All the reports were stronger than expected, and the bond market hates nothing more than growth,” said Alan Levenson, a money-market economist at UBS Securities Inc.

Measures of consumer confidence are watched closely for indications of future consumer spending, which accounts for about two-thirds of the nation’s economy. It also is one of the earliest economic indicators for December.

The consumer confidence index, calculated from a 1985 base of 100, is derived from responses to questions sent to 5,000 households nationwide, polling them on matters ranging from job availability to home-buying plans.

Consumers’ opinion of current business conditions gained 3 points from November, and their expectations for the next six months climbed 5 points.

Consumer optimism was widespread across the nation, with the biggest gains seen in the Rocky Mountain region. But confidence in New England fell by 20 points in December, after posting big gains in the three previous months.

Nearly 30% of families surveyed described current business conditions as good in December and only 6% of consumers expected conditions to deteriorate, the lowest figure in eight years.

“We were expecting an improvement,” said Dan Seto, an economist at Nikko Securities International Co. “But we didn’t expect it all in one leap.”

In the home sales report, the Commerce Department said sales of single-family homes totaled a seasonally adjusted 772,000 annual rate, up from a revised 676,000 in October, when sales initially were estimated at a 714,000 rate.

It was the highest level since an 820,000 rate in August and the biggest increase since sales rose 16.6% in April 1993. The dip in October pushed the sales rate below 700,000 for the first time in 1996.

By region, November sales rose 11.5% in the West to an annual rate of 214,000; soared 40.3% in the Northeast to 94,000; increased 16.0% in the Midwest to 109,000; and expanded 10.2% in the South to 355,000.

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New Home Sales

Seasonally adjusted annual rate, in thousands of units:

Nov. 1996: 772

Source: Commerce Department

Consumer Confidence

From a monthly survey of 5,000 households:

Dec. 1996: 113.8

Source: The Conference Board