All News & Blogs
BY CHRISTOPHER S. RUGABER
AP Economics Writer
WASHINGTON--Anyone puzzled by the most recent U.S. economic data has reason for feeling so: The numbers sketch a sometimes contradictory picture of the economy.
Here are some key elements:
After plunging when the housing bubble burst, home prices are finally rising steadily, according to the Standard & Poor's/Case-Shiller index. The index rose in July compared with a year earlier. That was the second straight year-over-year gain. Still, the annual pace of new-home sales dipped in August from a two-year high in July. At the same time, sales were nearly 28 percent above the level a year earlier.
For most Americans, a home is their most valuable asset. As its value increases, homeowners grow wealthier and typically feel more confident. That tends to spark more consumer spending--the U.S. economy's main fuel. Rising prices also lead more people to sell homes, further energizing the housing market. More sales would likely spur further homebuilding.
Home construction now plays too small a role in the economy to provide much lift. It made up only 2.4 percent of the economy in the April-June quarter. That compares with a peak of 6.3 percent at the end of 2005 and a longer-run average of just under 5 percent.
Record-low mortgage rates are likely to keep homes affordable and rising builder confidence also suggests that construction will keep growing..
Americans are feeling better about the economy despite chronically weak job gains and pay levels that lag inflation. The private Conference Board's index of consumer confidence is at a seven-month peak. A survey of consumer sentiment by the University of Michigan has reached its second-highest point in nearly five years. Both surveys found that consumers are lukewarm about current economic conditions but more optimistic about the future.
When consumers are confident, they're generally more likely to spend. Both surveys also found that consumers expect hiring to pick up.
You can't spend confidence. Rising confidence doesn't always lead to higher spending. And when an economy is healthy, consumer confidence is usually much higher than it is now.
Without more hiring and stronger pay raises, the recent gains in consumer confidence might not last.
Americans spent more in August. But that was mainly because they had to pay more for gas and some other items. Adjusted for inflation, consumer spending barely rose in August. That's been true for most of this year.
Americans were willing to spend more, even if much of it went in the gas tank. Consumers were even willing to save less in order to spend more. That's another sign of confidence.
Income failed to keep up with inflation, which is why consumers had to dip into savings.
That isn't sustainable for very long. If gas prices stay high, Americans would have less to spend on other goods, from cars and furniture to electronics and vacations, that fuel economic growth.
Spending will likely grow sluggishly without bigger increases in workers' pay and perhaps a moderation in gas prices.