U of Mich. May Consumer Sentiment Up

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U.S. consumer sentiment (search) rose for the second straight month in May as rising stock markets lifted consumer spirits, overshadowing a dismal jobs market, while Iraq war (search) concerns faded, market sources said Friday.

The University of Michigan (search)'s closely watched gauge of consumer confidence rose to 92.1 in May, its highest level in nearly a year, from April's 86.0, but slightly below economists' forecasts for a final reading of 92.6. The index fell from a preliminary reading for May of 93.2.

The index stood at 92.4 in June 2002.

The survey's index on consumern May from April's 96.4, while the index of future expectations rose to 91.4 from 79.3 last month.

"The report provides some modest encouragement that confidence is improving post-Iraq and consistent with a slightly firmer tone in the financial markets, particularly stocks," said Paul Ferley, assistant chief economist at BMO Financial Group in Toronto.

Consumer confidence is seen as a predictor of consumer spending (search), which drives two-thirds of the U.S. economy.

However, the drop in how consumers feel about the current economic environment is worrisome, Ferley said.

"That, in conjunction with continued weakness in labor markets, suggests spending could remain sluggish, but low interest rates should assure that growth remains in positive territory," he said.

May's report is the first full month after the end of the Iraq war and coincides with major U.S. stock averages rising to multi-month highs, including the Nasdaq's near one-year peak on Thursday.

Looking forward to June's report, economists are on the lookout to see whether the $350 billion tax cut package signed into law this week will lift consumer sentiment even further.

Financial markets were little changed by the consumer data, however stocks and the dollar surged while Treasury bonds slipped after the Chicago Purchasing Management index, a gauge of manufacturing activity in the midwest rose strongly in May.

The dollar surged more than 1 percent in value against the euro, yen and Swiss franc, while the Dow Jones industrial average, S&P 500, and Nasdaq Composite indexes all climbed more than 1 percent.

The Michigan data dovetails with other rising gauges of consumer confidence, including the ABC/Money Magazine Consumer comfort index (search), which gained ground for the first time in a month for the week ended May 25. Additionally, the U.S. Consumer Confidence index published by the Conference Board (search), a private business research firm, reached a six-month high in May. Both reports were released Tuesday.