American consumer confidence reached an 11-year high in January as a strengthening labor market and plunging gas prices kept households looking on the bright side.
The University of Michigan final consumer sentiment index rose to 98.1, the highest since January 2004, from 93.6 in December. The median estimate in a Bloomberg survey of 62 economists projected a reading of 98.2, the same as the preliminary figures issued earlier this month.
Americans were the most upbeat about the economic outlook in a decade thanks to dollars saved at the gas pump and better employment prospects in a healing job market. Consumer spending in the fourth quarter climbed by the most since 2006 as persistently low energy prices made paychecks go farther in the absence of larger wage growth.
“Consumer optimism did not waver in late January,” Richard Curtin, director of the Michigan Survey of Consumers, said in a statement. “The improvement has been due to more favorable trends in income and employment as well as the more recent declines in gas prices.”
The economy grew at a 2.6% annualized rate in the fourth quarter of 2014, after expanding at a 5% pace in the previous three months that was the strongest in more than a decade, a Commerce Department report showed Friday.
The average growth rate since the expansion began in June 2009 has been 2.3%.
The data showed consumer spending grew at a 4.3% pace in the last three months of 2014, the most since the first quarter of 2006.
Forecasts for the Michigan index ranged from 97 to 100 in the Bloomberg survey. The measure averaged 84.1 last year.
The survey’s current conditions index, which captures Americans’ assessments of their personal finances, rose to 109.3 this month, the highest since January 2007, from 104.8. It was revised from 108.3 earlier this month.
The measure of expectations six months from now increased to 91 from 86.4 in December, revised from a preliminary 91.6 reading.
Americans expected an inflation rate of 2.5% in the next year, the lowest since September 2010 and down from 2.8% in December.
Over a longer term of five to 10 years, consumers projected prices will rise 2.8%, the same as in the prior month.
The world’s largest economy is expanding as progress in employment and a sustained drop in fuel prices improve household balance sheets.
The fewest Americans in almost 15 years filed for unemployment benefits during a holiday-shortened week that could have distorted the data. Jobless claims plunged by 43,000 to 265,000 in the week ended Jan. 24, the lowest since April 2000, a Labor Department report showed Thursday in Washington.
Cheap gas is expected to give consumers greater purchasing power. The price of a gallon of regular gasoline was $2.05 on Jan. 29, according to U.S. auto group AAA.
More consumers than at any time in the past decade said they were likely to buy a car, the University of Michigan survey showed. They were also predisposed to buy large household durable goods such as washing machines and vacuum cleaners.
The report said discounts and low interest rates were the main reasons households gave for wanting to go shopping.
The Michigan survey also showed that the increase in sentiment this month was broad-based, with those making less than $75,000 a year showing similar gains in optimism as their wealthier counterparts.
Low oil prices are strengthening the outlook for companies like Honeywell International Inc., a worldwide operator in industries from aerospace to energy. The Morris, New Jersey-based manufacturer reported better than expected fourth-quarter earnings last week, based on strong sales of security systems and thermostats. The rout in oil prices had little impact on the company’s energy services, executives said.
“For the first time in five years, I’m actually a little more bullish on where the global economy is going than economic forecasters are,” Dave Cote, the company’s chief executive officer, said on a Jan. 23 earnings call.
The “impact to lower oil prices is causing this major redistribution from oil-producing to oil-using economies, and those oil-using economies are quite large,” Cote said.
Even with the economy expected to accelerate, Cote said he’ll remain cautious. Europe continues to be sluggish and U.S. companies face a drag from the strong dollar which has gained about 16% against the euro in the past year and 15% against the yen.
“While I believe lower oil prices will lead to a slightly better global economy than what’s forecasted currently, we’ll plan conservatively as always,” Cote said.