UMich: Consumer Sentiment Hits 18-Mo. High

U.S. consumer sentiment rose in early May to its highest level in 1-1/2 years as improvement in the stock market, better economic reports and relative calm in the Mideast lifted consumers' spirits.

The University of Michigan's preliminary May consumer sentiment index rose to 96.0, market sources said, a level not seen since December 2000 when the economy began its sharp descent into recession. The index had fallen to 93.0 in April, and May forecasts were for another small drop to 92.7.

"The report is encouraging in terms of reflecting a steady improvement in consumer attitudes, which should bode well for spending in the second quarter," said Anthony Karydakis, senior financial economist at Banc One Capital Markets in Chicago.

A rise in the index could corroborate the view that consumer spending, which underpins two-thirds of the U.S. economy, will not let up in the months ahead.

Retail sales data, which showed a 1.2 percent growth rate in April were double analysts' forecasts and ensured a strong start to second quarter growth after last year's recession.

Stocks extended gains after the data were released while U.S. Treasury securities plumbed lower as the report made it more likely the Federal Reserve will lift short-term interest rates in August from current four-decade lows.

After a red-hot 5.8 percent growth rate in the U.S. economy in the first three months of this year, economists are feeling more optimistic about a strong growth rate for the entire first half. While inflation remains tame, analysts say the central bank will eventually have to raise rates to ward off future price pressures as the economy firms.

The sentiment index has recovered substantially from a low of 81.8 struck after the Sept. 11 attacks on the U.S. but is a ways off its high of 111.3 struck in early 2000.

The Michigan preliminary current conditions index, which tracks consumers' views about their present financial situation, surged to 103.2 in May from 99.2, and the expectations index, which measures attitudes about the 12 months ahead, rose to 91.3 in May from 89.1 in April.

"It suggests perhaps that people are looking at wider evidence of recovery when framing their views - the apparent reacceleration in house prices might also be helping," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

"The index leads the unemployment rate by six months or so, and is now consistent with the rate falling below 5.5 percent by the fall," Shepherdson said.

The jobless rate rose to 6.0 percent in April, a 7-1/2 year high, from 5.7 percent in March.

The Michigan sentiment survey is based on telephone interviews with roughly 250 Americans across the country on personal finances and business and buying conditions. It is updated in final series with another 250 calls at month's end.