Consumers’ are much more upbeat about the economy this month as the gauge of both sentiment and confidence rose this month. Consumers are beginning to spend again too, although rather cautiously.

The Thompson Reuters / University of Michigan survey’s consumer sentiment index, which measures the attitudes and expectations of consumers concerning both present and future economic conditions, rose in June to 82.5 from 81.7 in May.

Consumer ConfidenceSentiment has been steady Eddy for most of the past year, with one hiccup around the time of the government shutdown. The survey’s most recent high was in April; coming in at 84.1, and its 12-month high was seen last July 2013 at 85.1.

The June survey recorded the largest proportion of households that reported making financial gains in nearly seven years. “The proportion of households that reported improved finances over the past year was 40% in June, up from 35% one month and one year ago,” Richard Curtin, director of the University of Michigan’s consumer surveys, said in a statement.

In addition, increasing percentages of consumers reported rising incomes and improved finances.

Some good news for real estate: The University of Michigan’s June survey also found half of all homeowners reporting home-selling conditions as favorable for the first time in eight years.

Consumer Confidence

The Conference Board’s consumer confidence index was released earlier this week and hit its best level in six years indicating consumers are feeling better about the economy.
This survey measures the level of confidence individual households have in the performance of the economy now and in the future. It is a leading indicator of future spending and the business cycle.

Economists say the two indexes, consumer sentiment and consumer confidence, usually track each other over time, though occasionally they diverge. Both surveys ask similar questions about current business conditions and hiring. They are also asked whether those trends will get better or worse in the future. The University of Michigan surveys fewer people, asks more questions, and yields more detailed information.

Last month the Conference Board’s reading of consumer confidence was 83 and 84 was expected for June. The June index came in hot at 85.2. The June reading was the highest since January 2008, just as the last recession began.

Financial markets interpret rising consumer confidence as a precursor to higher consumer spending. Higher consumer spending could in turn spark inflation. The more confident consumers are about the economy and their own personal finances,
the more likely they are to spend.

Personal Spending

Also this week, the Commerce Department reported that consumer spending rose 0.2% in May after a flat reading in April of no gains. Personal spending reflects what households pay for everything from groceries to doctor visits, and everything else in between.

The Commerce Department said the rise was entirely linked to higher prices.

Personal SpendingThe spending numbers were below some economists’ forecasts and raised some doubts of the prospects for strong growth in consumer spending for the current

Thursday’s report did include a silver lining. Personal Income, which is Americans’ incomes from wages, investment and government aid, rose 0.4% in May. This marks the fourth consecutive month of income growth and suggests progress in the labor market is boosting Americans’ paychecks.

Despite the increase in income, consumers are holding onto their money rather than spending.

Robust consumer spending is critical for the growth of the economy because it accounts for more than two-thirds of U.S. economic activity. Because of this, the markets follow any indicator relating to consumer behavior and attitudes.

The Federal Reserve has been projecting stronger growth in the economy as it winds down its bond-buying program which has helped mortgage rates remain low to stimulate spending, investing, and hiring. The Fed is looking for a pickup in household spending and incomes. Janet Yellen, Fed Chairwoman is confident that we’ll see a pickup in growth rates and anticipates consumer spending will continue to grow at a healthy pace.

The level of consumer sentiment is directly related to the strength of consumer spending. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend.

As American’s sentiment rises, it is likely personal spending will rise, which in turn will give a boost to the economy and housing.

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