Consumer confidence is up, but test looms

By Ylan Q. Mui and Neil Irwin
Washington Post Staff Writer
Wednesday, April 28, 2010

Consumers expressed more confidence in the economy than they have since 2008, but that goodwill -- a key to the recovery -- will be tested in the next few months as government stimulus programs wind down.

The Conference Board said in a report released Tuesday that gains in its monthly survey of consumers largely reflected improvements in the labor market as more people said jobs were plentiful and business conditions were good in April. The group's index of consumer confidence rose almost six points in April to 57.9, the highest level since September 2008. The jump was larger than some economists had expected, and they warned that many consumers remain considerably strained.

"If they have a job, most people think they'll be able to hold onto it. But that's the best you can say," said Mark Zandi, chief economist for Moody's

Consumers' willingness to spend is key to how the economic recovery progresses this year. The U.S. economy has been expanding since last summer, with only middling growth in personal consumption but strong growth in federal government spending, exports and residential investment.

The nation's gross domestic product is expected to have grown at a 3.3 percent annual rate in the first three months of the year, according to economists' forecasts for figures that are to be released Friday. That would mark the third consecutive quarter of growth.

With federal stimulus spending beginning to taper off over the second half of the year, the fragile recovery in the housing markets showing signs of petering out and exports unlikely to create the same boost over the next nine months that they did over the past nine months, it will be up to American consumers to pick up the slack and drive a continued expansion.

In that sense, the factors weighing on consumers -- continued downward pressure on wages because of high unemployment, fears of losing a job and the need to pay down debts -- could weigh on the economic expansion more broadly.

Shoppers have opened their wallets in recent months, sending retail sales up 1.6 percent in March. Sales in discretionary categories such as home furnishings and clothing have improved, and several retailers have reported stronger results.

Macy's raised its estimates for annual sales and profit Tuesday. The department store chain expects sales at established stores to grow 3 to 3.5 percent, up from 1 to 2 percent, this fiscal year. Earnings per share are predicted to be $1.75 to $1.80, up from $1.55 to $1.60.

Ford reported a $2.1 billion first-quarter profit Tuesday and said it expected a "solid profit" for 2010, a year sooner than it had previously forecast. In the first quarter of 2009, Ford lost $1.4 billion. It has not taken money from the federal government's aid program for automakers.

But Wal-Mart chief executive Mike Duke said on Tuesday that the 150 million customers who shop his stores each week are still being hammered by the recession. In addition, higher gas prices are eating into household budgets, resulting in fewer shopping trips.

"Some would say there is a recovery taking place," Duke said during a meeting with Washington Post editors and reporters. "The lower-income and middle-income customers . . . they still feel the pressure."

In addition, he said that the weak housing market continued to hold back the recovery in states such as Florida and Nevada. During the boom years, many jobs in those states were fueled by a surge of construction that has since abated, drying up the demand for labor.

"It will take housing to create some of those jobs," Duke said.

He said shoppers are still trading down in food purchases, and the company's internal research shows that the percentage of mothers who report job security and availability as a top concern has risen 5 percent since January. The world's largest retailer has responded to the pressures on its customers by keeping a laser-like focus on prices, most recently slashing prices on roughly 10,000 products across its stores.

"That's just an area we will not give an inch on," Duke said.

Staff writer Peter Whoriskey contributed to this report.

© 2010 The Washington Post Company