The U.S. economy remains on track to expand by around 2.6 per cent this year, led by improving labour and equity markets and rising confidence. While soaring gasoline prices are a concern, the economy is now in a better position to handle the increase—as long as world oil prices don’t skyrocket to the $140–$150 dollar per barrel range. Unfortunately, that is a development that can’t be ruled out if a conflict breaks out between Israel and Iran over the latter’s nuclear program.

Retail gasoline prices have been rising steadily in recent weeks, and, at $3.72 per gallon, are higher than the fourth-quarter average of around $3.40. They are also up close to $0.50 from where they were a year ago. The increase is linked to some refinery shutdowns and concerns about a conflict in the Middle East. While the increase is worrisome and will definitely affect household spending, higher gasoline prices are unlikely to derail the economic recovery. Most households today are in a better position to absorb higher gasoline prices, thanks to stronger job creation that is resulting in higher paycheques. Also, the extension of the payroll tax holiday and unemployment insurance benefits has provided some cushion for consumers by putting around $150 billion back into the economy.

The economy created 227,000 new jobs in February. That follows a gain of 284,000 in January.

To date, rising gasoline prices have failed to put a dent in consumer confidence. The Conference Board Inc.’s index of household sentiment increased to 70.8 in February—a 9.3 point increase from January. An improving labour market and higher equity prices appear to be outweighing the negative effect on sentiment attributable to higher gasoline prices. Assessments of current labour market conditions improved sharply in the latest survey. The portion of respondents indicating that jobs were hard to come by dropped to 38.7 per cent, down from 43.3 per cent in January. A somewhat surprising result from the survey was the fact that respondents didn’t change their outlook for inflation despite higher gasoline prices. This could change in the March survey if gas prices continue to climb.

The latest jobs report should put U.S. households in an even better mood. The economy created 227,000 new jobs in February. That follows a 284,000 gain in January. Monthly employment has now surged above 200,000 for three straight months. The unemployment rate was unchanged at 8.3 per cent. The sectors of the economy that recorded the largest increases were business and professional, education and health care, leisure and hospitality, and manufacturing. Construction employment declined in February, likely due to seasonal factors. And although the public sector continued to shed workers, the pace of job losses abated somewhat in February. The need to lower deficits at all levels of government implies that jobs in this sector will be hard to come by over the near term. Confidence in the labour market is slowly improving as evidenced by the fact that more workers left their jobs voluntarily in February and fewer workers lost their jobs. Also, the number of people out of work for more than one year dropped last month.

Sales of existing homes increased in January to 4.57 million (annualized), up from 4.38 million in December, and 4.05 million in July of 2011.

Improving confidence is also showing up in home sales. Sales of existing homes increased in January to an annual rate of 4.57 million, up from 4.38 million in December and 4.05 million in July of 2011. The underlying fundamentals that drive housing demand—including labour markets and confidence—are gradually improving. As a result, sales have generally been on the upswing since the middle of last year. Also, housing remains highly affordable as mortgage rates remain at record lows and home prices continue to fall in some parts of the country. The downward pressure on home prices will start to ease, as distressed sales are expected to peak around the middle of this year. While this development will decrease home affordability somewhat, it will help household wealth, which could translate into higher spending over the near term.