June 3, 2011

U.S. Consumer Confidence Rises, According to RBC

Americans divided on how to reduce national deficit

Despite a spate of bad economic news recently, the RBC Consumer Outlook Index found U.S. consumer confidence has hit its highest level since the beginning of the financial crisis in September 2008.

The index attributes the sentiment to a pause in the increase of gas prices and a sense that the job market is improving.  As measured by the RBC Consumer Outlook Index, consumer confidence rose to 46.7 for June, up 3.8 points from May's 42.9 reading.

"The rise in consumer confidence in June was broad-based, with all of the key underlying metrics rising,” RBC Capital Markets Chief U.S. economist Tom Porcelli said in a statement. “This improvement is likely a response to the sharp pullback in gasoline prices over the last few weeks. That said, it's important to note that even with this welcomed increase, confidence remains below the historical average and is only slightly better than the average for all of 2010."

With the federal debt ceiling having been reached and Congress focused on deficit reduction, Americans remain divided over what course they want lawmakers to take. Although defense and entitlements make up the largest part of the budget, only one in four Americans (27%) want to see defense spending reduced and 17% want to see Medicaid cut.

Even fewer want to cut Medicare (12%) or Social Security (10%). Only one in five (18%) want to see tax increases as part of a budget deal. Instead, 59% of Americans want Congress to cut an unspecified group of "other government programs."

"While most people recognize that the deficit is a significant issue, it seems that few appreciate what really is required to fix the problem," Porcelli added. “Few are willing to see entitlements, the most problematic part of the deficit, scaled back. Instead, most favor scaling back ‘other’government spending, which accounts for a very small share of the deficit. The lack of willingness by voters to take on these issues highlights the high hurdle for elected officials to adopt the real and necessary reforms required to get the deficit under control."

This month's is driven partly by a stronger Current Conditions Sub-Index, which rose nearly four points to 36.8, from 32.9 in May, its highest since January 2010. While still low by historical standards, this is the highest Current Conditions score observed over the past year.

The strengthening of the Investments Sub-Index, which improved 4.5 points to 41.0, up from 36.5 in May, also contributed to the improvement in the overall Index. As with the Current Conditions Sub-Index, June's Investments Sub-Index number was the highest since January 2010. However, despite the stock market's generally positive performance in recent months, large numbers of consumers continue to believe that it is a bad time (32%) to get into the market or are unsure (52%).

The Jobs Sub-Index rose nearly four points to 54.7 this month, up from 50.8 in May, its highest level since January 2008. It is also the first time since 2008 that employment confidence has been above the historical mean of 53.9.

The Consumer Expectations Sub-Index also rose this month to 56.6, up 3.4 points from 53.2 in May, barely below the 12-month high of 56.8 in February. Reflecting the growing optimism, nearly four in 10 Americans (38%) say the country is headed in the right direction, compared to 62% who say it is on the wrong track. While hardly a ringing endorsement of the country's condition, the "right direction" number climbed 8%, up from 30% last month.

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