With unemployment high and home prices falling in the nation’s largest cities, consumer confidence took an unexpected turn for the worse in December.
The decline followed two months of rising optimism. Economists say the economic recovery is likely to be less fitful next year.
“The modest drop in the confidence index is not worrisome,” said Omair Sharif, economist at RBS Economics Research. “What matters to us — and to the economy — is that consumers are getting out there and spending. We’re looking at the best holiday season for retailers in five years.”
Busy malls in December are a big reason economists are less concerned about the latest consumer confidence figures. There’s also a slew of data that suggest next year will be brighter. Layoffs are slowing, businesses are investing money in computers and equipment, and the stock market has risen to its highest point in two years.
Still, consumers are not quite convinced.
The Conference Board, a private research group, said its Consumer Confidence Index fell to 52.5 in December, down from a revised 54.3 in the November survey. It takes a reading of 90 to indicate a healthy economy. The last time the index was that high was in December 2007, just as the recession began.
Among the 5,000 people surveyed this month, many expressed concerns about jobs. Fewer see them as “plentiful.” More described them as “hard to get.”
The unemployment rate rose to 9.8 percent in November, and only 39,000 net jobs were created that month.
Chris G. Christopher Jr., senior principal economist at IHS Global Insight, cautioned not to read too much into one report. A downward trend over several months would be more worrisome, he said.
The same goes for the holiday sales data, which showed shoppers spending at the fastest pace since 2006. Key areas such as jewelry, home furnishings and consumer electronics are still below pre-recession levels. Many retailers offered discounts on holiday merchandise starting in late October and free shipping to lure buyers back.
Christopher will have a better sense of consumers’ mood when he sees how they spend after the holidays.
“There was a lot of unleashing of pent-up demand,” Christopher said. “Things are getting better, but there are still a lot of negatives.”
The biggest may be the decline in home prices in the largest U.S. cities. Every city in the Standard & Poor’s/Case-Shiller 20-city home price index posted a decline from September to October. The last time that happened was in February 2009.
Prices are expected to keep falling through the middle of next year, as fewer people buy homes and millions of foreclosed homes come on to the market.
This year is on pace to finish as the worst for home sales in more than a decade. High unemployment and tight credit have kept people from buying. And that’s despite some of the lowest mortgage rates in decades, which have recently begun to spike.
Many people are holding off on purchases because they fear the market has not hit bottom, analysts say.
Buyers aren’t just skittish in the hardest-hit cities, such as Las Vegas or Phoenix.
Home prices in Atlanta have fallen 6 percent in the past four months. That’s the worst decline among the 20 cities in that time, and it erases gains made in the spring, when the government offered home-buying tax credits.
Home prices in Dallas; Portland, Ore.; Charlotte, N.C.; Tampa, Fla.; and Denver have fallen for four straight months.
Neither the dip in confidence, nor the drop in housing prices, caused economists to back down from their more optimistic outlook for 2011.
Stronger spending by consumers will help the economy grow faster in 2011. Some experts predict growth will clock in at around 4 percent, which would mark the fastest pace in 11 years and an improvement from the 2.8 percent pace projected for this year.
For economists, what’s most important is what consumers do, rather than how they feel.
“People are saying they are still worried,” said Joel Naroff, president of Naroff Economic Advisors. But those same consumers “have hit the malls pretty hard.”