Comfort Zone

RAPAPORT… Consumers have shown growing optimism about the 2007 economy, according to one major barometer of consumer sentiment, the ABC News/Washington Post Consumer Comfort Index (CCI), which is based on Americans’ ratings of the national economy, the buying climate and their own finances.

At press time, the weekly CCI, which has been above average since October, had moved into positive territory for the first time this year, equaling the high for all of 2006. The CCI was at +1 on its scale of +100 to -100. It dipped to -5 at the beginning of the year after moving briefly into the positive in mid-December, but has been moving up since. Looking a little further back, it’s also been a lot worse, hitting -19 in August 2006.

The index, released February 20, found that 48 percent of the 1,000 Americans surveyed rate the national economy positively, matching its recent five-year high of 48 percent in mid-December, and eight percentage points above the long-term average of the weekly polls since they began in 1985.

Sixty-four percent of those surveyed rate their personal finances positively, which is higher than the long-term average of 57 percent. That figure hit 65 percent in mid-November, the highest since August 2001. And, in good news for retailers, 40 percent of those surveyed said right now is a good time to buy things, three percentage points above the long-term average.

CONSUMER SPENDING UP

Consumer spending figures support the positive outlook documented by the CCI. In the fourth quarter, according to the Commerce Department, consumer spending helped drive the nation’s economy to an inflation-adjusted growth rate of 3.5 percent, up 2 percent from the third quarter and 2.6 percent higher than the second quarter. That’s important, because consumer spending accounts for more than two-thirds of the American economy. Such spending has risen at an annualized rate of 4.4 percent. Consumer spending increased in December by the most in five months, according to the Commerce Department. Purchases rose 0.7 percent after a 0.5 percent increase in November.

These are important figures, according to Greg McBride, senior financial analyst for Bankrate.com, a major online aggregator of financial rate information. “Consumer confidence is strong, but it’s notoriously fickle. Actions speak louder than words,” he says. And consumer spending figures are hard evidence that consumers feel good about the economy.

“There are three telling fundamentals that really underscore the consumer viewpoint,” McBride says. “Consumer spending jumped 6 percent last year, the economy continues to perform very well and income is on the rise.” Commerce Department figures released at the end of January showed that consumers spent briskly enough to offset the housing slump in the fourth quarter.

Income drives spending and Labor Department figures showed an increase in average hourly earnings, up 4 percent from a year ago. Workers’ hourly earnings rose three cents or 0.2 percent, to $17.09 after increasing 0.4 percent the previous month. These figures are important — when consumers feel their income is increasing, they are much more comfortable spending money.

PERSONAL INCOME GROWS

Another measure, by the Commerce Department’s Bureau of Economic Analysis (BEA) in late December, found that U.S. personal income grew 1.4 percent in the third quarter of 2006, which equals its average growth rate since 2003. This came on the heels of a slower 0.8 percent gain in the second quarter. The BEA’s next personal income data will be released at the end of March.

The BEA noted that this growth occurred across the country, picking up in all regions, with the strongest improvements in the Western and Mideastern states. The Southwest region grew faster than the other seven regions in the third quarter, as it has in most of the last seven quarters. Since 2004, the Southwest region has grown almost five percentage points faster than the nation.

Third-quarter personal income growth in all regions exceeded inflation as measured by the national price index for personal consumption expenditures. The inflation rate fell to 0.6 percent in the third quarter, down from 1 percent in the second. Seven of the fastest-growing states in the third quarter — Arizona, Louisiana, Nevada, New Mexico, Texas, Utah and Wyoming — share a still-expanding construction sector that contrasts with declining construction earnings in most of the rest of the country.

Four of the fastest-growing states — Louisiana, New Mexico, Texas and Wyoming—are also notable for the relatively large contribution to earnings growth made by mining — including oil and gas extraction — a small industry that has sustained a rapid expansion for four years. Mining also made a relatively large contribution to third-quarter earnings growth in Oklahoma, Alaska and West Virginia.

Personal income growth of 2.6 percent in the state of Washington was the highest of all states. It reflects huge gains from the exercise of stock options by employees in the information industry. The gains are counted as part of earnings, which grew 47 percent in that industry in the third quarter. The exercise of stock options in the information industry has frequently propelled Washington to first place in the growth rankings, according to the BEA, then dropped the state into last place the following quarter.

Louisiana’s personal income grew faster than the nation’s in the third quarter, the first time this year that its recovery from Hurricane Katrina had such a strong effect. The recovery shows up more clearly in earnings, which have grown twice as fast in Louisiana as in the U.S. over the last six months. The BEA said that the strong earnings rebound is offset somewhat by weak transfer receipts as disaster assistance and unemployment compensation taper off.

In the third quarter, Michigan accounted for almost half of the national gain in earnings in durable goods manufacturing — $1.2 billion out of $2.6 billion — despite a job loss of 3.1 percent. The contrary movements in earnings and jobs primarily reflect the General Motors (GM) and Delphi employee buyouts and are apparent in other Great Lakes states, such as Indiana and Ohio, as well as in Louisiana and Delaware. Aside from the buyouts, earnings growth in the durable goods industry was generally anemic across the country.

Jobs were up, although not quite as much as economists had expected. Nonfarm payrolls increased 111,000 in January, after growing by 206,000 in December and 196,000 in November, according to the Labor Department.

Such moderate gains ease concerns about inflation, maintaining a balancing act that is keeping the Federal Reserve Board comfortable about existing rates — and consumers comfortable spending money.

Consumer Comfort Index
Week of Last 4 Weeks 3 Months 1 Year 12-Month 12-Month 12-Month
General Population 2/19/07 Week Ago Ago Ago High Low Average
Overall Index 1 -3 -3 0 -13 1 19 -9
State of Economy -4 -8 -8 -10 -20 -4 -34 -19
Personal Finances 28 22 22 30 14 30 10 19
Buying Climate -20 -22 -22 -20 -34 -12 -36 -26
Source: ABC News/Washington Post Consumer Comfort Index, Feb. 19, 2007