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Consumer confidence index rises to 102.0 in May

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Labor market differential widens to 24 from 22.9

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House price increase slows in March

By Lucia Mutikani

WASHINGTON, May 28 (Reuters) - U.S. consumer confidence

unexpectedly improved in May after deteriorating for three

straight months amid optimism about the labor market, but

worries about inflation persisted and many households expected

higher interest rates over the next year.

The mixed survey from the Conference Board on Tuesday also

showed more consumers believed that the economy could slip into

recession in the next 12 months. Nonetheless, consumers were

very upbeat about the stock market and more planned to buy major

household appliances over the next six months.

While the economy is expected to slow this year as a result

of the cumulative impact of 525 basis points worth of interest

rate hikes from the Federal Reserve since March 2022 to tame

inflation, economists and most business executives are not

forecasting a downturn.

"Continued positive job growth, rising wages, an ebullient

stock market and healthy household balance sheets will keep

consumers spending despite elevated prices and borrowing costs,"

said Oren Klachkin, financial market economist at Nationwide.

The Conference Board said that its consumer confidence index

increased to 102.0 this month from an upwardly revised 97.5 in

April. Economists polled by Reuters had forecast the index

slipping to 95.9 from the previously reported 97.0. It

outperformed the University of Michigan's sentiment index.

Confidence remains within the relatively narrow range it has

been hovering in for more than two years.

The improvement was across all age groups, with consumers

making annual incomes over $100,000 posting the largest increase

in confidence. On a six-month moving average basis, confidence

remained highest among the under-35 age cohort and those with

annual incomes of more than $100,000.

Consumers' perceptions of the labor market also improved,

with the survey's so-called labor market differential, derived

from data on respondents' views on whether jobs are plentiful or

hard to get, widening to 24 from 22.9 in April, though

opportunities are probably not as abundant as in the past year.

"The level of this measure remains elevated by historical

standards and points to a still strong labor market," said

Michael Hanson, an economist at JPMorgan.

The measure closely correlates to the unemployment rate in

the Labor Department's employment report. Labor market

resilience, mostly characterized by historically low layoffs, is

underpinning the economic expansion. Consumers' 12-month

inflation expectations rose to 5.4% from 5.3% in April.

"Consumers cited prices, especially for food and groceries,

as having the greatest impact on their view of the U.S.

economy," said Dana Peterson, chief economist at the Conference

Board. "Perhaps as a consequence, the share of consumers

expecting higher interest rates over the year ahead also rose,

from 55.2% to 56.2%."

About 48.2% of consumers in the survey expect stock prices

to increase over the coming year, compared to 25.4% anticipating

a decrease.

Stocks on Wall Street were trading higher, with the

technology-heavy Nasdaq index breaching the 17,000 level

for the first time. The dollar fell against a basket of

currencies. U.S. Treasury prices were lower.

HOUSE PRICE GAINS SLOW

Consumers' inflation and interest rate views were likely

colored by a surge in price pressures in the first quarter.

That, together with still-solid economic growth, has prompted

financial markets to push back expectations for the first rate

cut from the U.S. central bank to September from June. The Fed

has kept its policy rate in the 5.25%-5.50% range since July.

Consumers' perceived likelihood of a recession over the next

year rose for the second consecutive month. Despite concerns

about higher prices and an economic downturn, consumers are not

planning to cut back on spending in a significant way.

The survey's measure of buying plans for major appliances

over the next six months rose to 49.4 from 43.0 in April, driven

by television sets, refrigerators, vacuum cleaners and clothes

dryers.

Buying plans for motor vehicles were unchanged while those

for houses dropped amid higher mortgage rates and elevated home

prices. On a six-month moving average basis, purchasing plans

for homes were unchanged in May at their lowest level since

August 2012.

A separate report from the Federal Housing Finance Agency on

Tuesday showed house prices increased 6.7% in March on a

year-on-year basis after advancing 7.1% in February.

Prices are being driven by a shortage of homes available for

sale, and housing costs have been the major driver of inflation.

Though supply is gradually improving, it remains well

below pre-pandemic levels.

"We expect home price growth to remain positive in the

quarters ahead, with risks skewed to the upside," said Bernard

Yaros, lead U.S. economist at Oxford Economics.

"Scarce supply in the resale market, a sturdy labor

market, and pent-up demand from Millennials aging into their

prime household-formation years argue for potentially firmer

house price gains than in our baseline forecast."