Consumer confidence rose to a five-year high in November, according to Capital Economics.
But the research firm says current economic indicators do not seem strong enough to serve as a basis for recent spikes in consumer confidence — and the fragile housing recovery currently underway.
So the mystery is what has caused improvements in consumer confidence even as job numbers, gasoline prices and the threat of potential tax hikes continue to pose economic challenges for citizens?
When looking at Capital Economics’ recent report and the Fed’s Flow of Funds accounting report, it seems rising home prices and household wealth may be causing some Americans to feel more positive. This is occurring even though Capital Economics reports that “equity prices are flat-lining, gasoline prices remain high, earnings growth is slowing and there has been no major improvement in jobs growth.”
But what is improving is household net worth, and that may be a strong enough force to outpace all of the pessimism, especially after years of home price declines.
The Fed’s flow of funds report says not only did household debt fall by an annual rate of 2% in the third quarter, but home mortgage debt contracted 3% while household net worth rose $1.7 trillion from the second to third quarter.
This factor alone may be causing the uptick in consumer confidence, and Capital Economics doesn’t disagree with the notion that housing improvements are creating optimism.
“The recent strengthening of the recovery in the housing market, which so far has culminated in prices rising by more than 5%, may have been cheering up households,” wrote Paul Dales, an economist with Capital Economics. “After all, house prices fell sharply in each of the five years to 2012.”
Still, Dales notes consumer confidence is not where it needs to be even with the housing boost.
“More generally, if confidence is going to rise back to pre-recession levels, the S&P 500 will need to rise to 1,600, jobs growth will need to strengthen further, gasoline prices would need to fall to around $3.00 a gallon and annual earnings growth will need to rebound from below 2.0% to 3.0%,” Capital Economics added.
