Consumer confidence points to solid gain in sales

Shoppers exit the Ralph Lauren Corp. store on Prince Street in the SoHo neighborhood of New York, last Friday. Cheaper gasoline will likely benefit lower-income households the most because they spend a larger share of their pay on fuel, said Xiao Cui, a U.S. economic research analyst at Credit Suisse Securities in New York. Bloomberg News

Americans brimmed with confidence in early December as they shopped for holiday gifts, signaling retailers will see sales continue to accelerate heading into 2015.

The Thomson Reuters/University of Michigan preliminary December index of consumer sentiment increased to 93.8, the highest since January 2007, from 88.8 last month. The gain exceeded the 89.5 median forecast in a Bloomberg survey of economists, topping the estimate by the most since March 2013.

Six months of falling gasoline prices are freeing up disposable income for households during merchants' busiest time of the year. Sustained hiring combined with faster wage growth is providing the impetus for further retail sales gains that will underpin the economy as the year draws to a close.

"Everything is pointing in the right direction for the consumer," said Paul Ashworth, chief U.S. economist at Capital Economics NA in Toronto, whose forecast that the confidence index would rise to 94 was the closest among those surveyed. "We expect a pretty good run for consumption growth in the fourth quarter. It is a big boost for the economy."

The gain in sentiment this month put the index above its average in the five years leading up to the last recession that began in December 2007.

The Michigan index's gauge of current conditions, which measures Americans' views of their personal finances, increased to the highest level since February 2007. The gauge of Americans' expectations about the economy six months from now was the strongest since January 2007. Its 6.2-point gain from November was the biggest since May 2013.

Stocks decline

Stocks sank, with the Dow Jones Industrial Average capping its biggest weekly drop in three years, as oil continued to slide and Chinese industrial data raised concern over a global economic slowdown. The Dow slumped 1.8 percent to 17,280.83 at the close in New York.

Estimates of 69 economists in the Bloomberg survey for the Michigan index ranged from 87 to 94.

New products and holiday deals also may be helping fuel sales of electronics at places such as Best Buy Co. Cooler weather, meanwhile, is inspiring shoppers to buy coats and boots -- a boon for Gap Inc.'s Old Navy and PVH Corp. brands Tommy Hilfiger and Calvin Klein.

Data yesterday from the Commerce Department showed retail sales rose 0.7 percent in November as consumers used some of the money saved at the gas pump to purchase electronics, clothing and furniture.

Broad Gains

Last month's gain was the biggest since March and followed a 0.5 percent advance in October that was larger than previously estimated. Demand improved in 11 of 13 major store categories.

"It's pretty clear that conditions are improving along with the fall in gasoline prices," said Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. "Consumers are going to have more discretionary income and will be more willing to spend."

The average nationwide cost of a gallon of regular fuel was $2.60 yesterday, the cheapest since 2009 and down from an April high of $3.70, according to figures from AAA, the nation's biggest auto group.

Cheaper gasoline will likely benefit lower-income households the most because they spend a larger share of their pay on fuel, said Xiao Cui, a U.S. economic research analyst at Credit Suisse Securities in New York. "We should be able to see a positive effect on consumer spending in other categories outside of gasoline," Cui said.

Inflation Expectations

Consumers in the Michigan survey forecast the annual inflation rate will increase to 2.9 percent five years from now, rebounding from the 2.6 percent projection in November that was the lowest since 2009.

Stronger demand has coincided with the largest monthly advance in employment in almost three years. The 321,000 gain in November payrolls followed a 243,000 increase that was larger than initially reported by the Labor Department. The pickup extended from factories to retailers, while average hourly earnings climbed the most since June of last year.

Falling energy costs are holding down inflation. Wholesale prices in November fell more than forecast, according to a Labor Department report today. The 0.2 percent drop in the producer- price index followed a 0.2 percent gain in the prior month. Costs were up 1.4 percent over the past 12 months, the smallest increase since February.

The figures come as Federal Reserve officials prepare to meet next week to weigh the timing of the first interest-rate increase since 2006.