WASHINGTON (Reuters) - U.S. consumer confidence jumped to a near 17-year high in October, with households upbeat about the labor market and business conditions, which could underpin consumer spending and boost the economy in the final three months of the year.
The economy’s prospects were further bolstered by other reports on Tuesday showing an acceleration in wage growth in the third quarter and sustained increases in house prices in August. The strong domestic fundamentals likely keep the Federal Reserve on track to raise interest rates in December.
“An optimistic consumer emboldened by a solid economy and an increasingly competitive labor market is likely to continue to spend, reinforcing a virtuous cycle that should be supportive of further growth,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.
The Conference Board said its consumer confidence index increased 5.3 points to 125.9 this month, the highest reading since December 2000.
The surge in confidence was probably driven by expectations of big tax cuts after President Donald Trump and Republicans in the U.S. Congress vowed to enact tax reform this year. The proposed plan unveiled in late September promises to deliver up to $6 trillion in tax cuts for businesses and individuals.
Record high share prices also likely contributed to the rise in consumer confidence this month. Confidence among households in the $125,000 and over income group increased sharply, but optimism among low-income consumers was mostly lower.
“The rich only get richer in this economy where the advancing tide is not lifting all the boats,” said Chris Rupkey, chief economist at MUFG in New York.
The Conference Board survey’s so-called labor market differential, derived from data about respondents who think jobs are hard to get and those who think jobs are plentiful, was the most favorable since July 2001.
This measure, which closely correlates to the unemployment rate in the Labor Department’s employment report, is pointing to further declines in the jobless rate and labor market slack. The labor market is near full employment, with the jobless rate at a 16-1/2-year low of 4.2 percent.
Tightening labor market conditions are gradually generating a faster pace of wage growth. A separate report from the Labor Department showed the Employment Cost Index, the broadest measure of labor costs, increased 0.7 percent in the third quarter after rising 0.5 percent rise in the second quarter.
That lifted the year-on-year rate of increase to 2.5 percent, the largest gain since the first quarter of 2015.
Signs of a pickup in wage growth, which has lagged the eight-year economic recovery, are likely to be welcomed by Fed officials, who are scheduled to begin a two-day policy meeting later on Tuesday. The U.S. central bank is unlikely to raise interest rates this week, but is expected to increase borrowing costs in December for a third time this year.
U.S. stocks were trading higher, also lifted by upbeat earnings from consumer companies Mondelez MDLZ.O and Kellogg K.N. The dollar was little changed against a basket of currencies, while prices for U.S. Treasuries slipped.
Steadily increasing wages offer hope that inflation could soon trend higher. Economists say labor costs need to rise by at least 3 percent to push inflation closer to the U.S. central bank’s 2 percent inflation target. Labor costs increased 2.4 percent in the year to June.
A government report on Monday showed the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increasing 1.3 percent in the 12 months through September. The core PCE has undershot the Fed’s 2 percent target for nearly 5-1/2 years.
“As long as the labor market remains tight and wages are firming, Fed officials will continue to expect inflation to move higher next year and thus will be inclined to stay on the gradual normalization path, even in the face of current low inflation prints,” said Kevin Cummins, senior U.S. economist at NatWest Markets in Stamford, Connecticut.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack. It is also considered a better predictor of core inflation.
Wages and salaries, which account for 70 percent of employment costs, rose 0.7 percent in the third quarter. They increased 0.5 percent in the second quarter. Wages and salaries were up 2.5 percent in the 12 months through September after gaining 2.3 percent in the year to June.
A third report on Tuesday showed the S&P CoreLogic Case-Shiller composite home price index of 20 U.S. metropolitan areas rose 5.9 percent in August from a year ago after increasing 5.8 percent in July.
House prices are being driven by an acute shortage of properties available for sale. Robust consumer confidence, rising wages and strong house prices should keep consumer spending supported for the rest of the year.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.4 percent annualized rate in the third quarter. Households, however, relied heavily on savings to fund purchases, leading to concerns that consumer spending could slow down in the months ahead.
Savings dropped in September to their lowest level since August 2008. A fourth report showed factory activity in the Midwest vaulted to a 6-1/2-year high in October.
Reporting by Lucia Mutikani; Editing by Andrea Ricci
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