- The Washington Times - Tuesday, April 25, 2006

NEW YORK (AP) — The U.S. economy showed signs of resilience yesterday, adding fuel to speculation that the Federal Reserve would continue on its course of raising interest rates.

A widely watched barometer of consumer confidence rose this month to its highest level in almost four years, a private research group reported, and sales of previously owned homes edged up last month after also rising in February.

Analysts said that if fuel prices continue to rise and the economy remains buoyant, the Fed may have more reasons to keep tightening credit policy to choke off inflation. The combination of higher interest rates and more expensive fuel could cast a pall on consumer spending, which accounts for two-thirds of all U.S. economic activity.

“The increase [in gas prices] looks like it’s hitting a critical level,” said Gary Thayer, chief economist at A.G. Edwards & Sons Inc., pointing out that it will be harder for the improvement in the job market to outweigh the concerns about gasoline prices.

The Conference Board said that its Consumer Confidence Index rose to 109.6, up from a revised 107.5 last month. April’s reading was the highest since the index touched 110.3 in May 2002. Analysts expected 106.4.

Confidence has been on an upswing since November in the aftermath of the Gulf hurricanes, except for a sharp dip in February when short-lived pessimism over the labor market soured consumer sentiment.

“Improving present-day conditions continue to boost consumers’ spirits,” said Lynn Franco, director of the Conference Board Consumer Research Center. “Recent improvements in the labor market have been a major driver behind the rise in confidence in early 2006. Looking ahead, consumers are not as pessimistic as they were last month.”

Ms. Franco added, however, that “while prices at the pump have yet to impact confidence, further increases could dampen consumers’ mood.”

The component of the Consumer Confidence Index that measures how consumers feel now about economic conditions rose to 136.2 from 133.3. Another component, which measures consumers’ outlook over the next six months, improved to 91.9 from 90.3 last month.

Meanwhile, the housing market boom that helped fuel consumer confidence for the past few years is limping along.

The National Association of Realtors reported yesterday that sales of existing homes edged up a meager 0.3 percent last month to a seasonally adjusted annual rate of 6.92 million units.

The March increase followed a bigger 5.1 percent jump in February. The two months marked the first advances after five consecutive monthly declines.

Stocks slipped after both reports caused investors to be concerned that the Federal Reserve now may have more incentive to raise interest rates beyond the one-quarter percentage point increase to 5.0 percent that is expected in May.

The reports give the Fed more confidence “to move rates again” next month and take “a wait-and-see” stance for the rest of the year, said Michael P. Niemira, chief economist at the International Council of Shopping Centers.

Despite the interest rate concerns, the consumer sentiment report was an encouraging sign for retailers. Consumer spending perked up this month after tepid spring sales in February and March.

“It shows a relatively healthy sales picture,” Mr. Niemira said. “The question is how will the consumer react when oil prices filter through the rest of the economy.”

Job growth has been solid, but Americans are paying more for gasoline, which has risen to about $3 a gallon and is expected to increase more during the heavy summer driving season. The Conference Board derived its index from responses received through April 18, which was before gasoline prices surged to new highs.

The Conference Board said that consumers’ overall assessment of current conditions remains favorable. Those saying conditions are “good” rose to 29.7 percent from 27.9 percent. Those saying conditions are “bad” rose to 15.1 percent from 14.7 percent.

Consumers’ views about current labor market conditions improved. Those saying jobs are “plentiful” increased to 29.1 percent this month from 28.3 percent last month, while those saying jobs are “hard to get” edged down to 19.6 percent from 20.4 percent.

The outlook for the labor market was mixed, however. Those expecting more jobs to become available in the coming months increased to 15.7 percent from 13.7 percent last month. Those expecting fewer jobs, however, remained unchanged at 16.4 percent.

Patrick Fearon, senior economist at A.G. Edwards, noted that consumers’ ability to spend ultimately depends on how the labor market fares.

“The labor market still looks good, and that gives us some cushion to handle a softening housing market and rising gasoline prices,” Mr. Fearon said. But he warned that higher energy costs could unravel any gains in employment as companies are forced to cut back hiring.

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