By  on December 29, 2004

NEW YORK — Consumers are ending 2004 on a high note, breaking a four-month slide in the confidence index due to optimism about their income prospects.

The Conference Board’s Consumer Confidence Index rose to 102.3 in December, up from 92.6 last month, surpassing the 93.9 consensus projection by Wall Street economists. It had been in decline since August. While the Index rebounded in December to its highest level in five months, it didn’t pass the high reached in July when it was at 105.7. Looking ahead, the Expectations Index rose to 99.9 from 90.2 and the Present Situations Index jumped to 105.9 from 96.3.

The surge in consumer confidence sent U.S. stock indices to three-and-a-half-year highs. The Dow Jones Industrial Average rose 78.41 points to end trading on Tuesday at 10,854.54; the Nasdaq rose 22.97 points to 2,177.19, and the S&P 500 gained 8.62 points to 1,213.54.

“The continuing economic expansion, coupled with job growth, has consumers ending the year on a high note,” said Lynn Franco, director of the Board’s Consumer Research Center.

“The most significant contributor to the rebound in confidence has been the overall improvement in current conditions over the past twelve months. And consumers’ outlook suggests that the economy will continue to expand in the first half of the new year,” she added.

While retail sales during December have seemed somewhat disappointing, suggesting that cautious shoppers were walking the aisles on the prowl for bargains, economists are pointing to the increased use of gift cards and the online shopping channel as more accurate reflections of how consumers were spending their hard-earned cash over the holidays.

Richard Hastings, an independent economic consultant, observed, “I don’t think retail sales will be down when the final numbers are tallied. The problem is that retail sales figures don’t take into account gift-card sales, which rose 8.1 percent over last year, according to Spendingpulse.com. Once you add in gift-card sales and holiday shopping online, spending by consumers for holiday is actually higher. Before, you really didn’t want to do any online shopping with dial-up connections. But now, many have broadband and other high-speed connections, which has helped spread online shopping as a viable channel.”Hastings also said the higher confidence level bodes well for retailers for early 2005. He explained: “If consumers can find jobs and borrow money, they’re going to go shopping.”

Consumers were particularly upbeat about the outlook in 2005. Those expecting business conditions to improve increased to 22 percent from 20.3 percent last month, while those who anticipated a worsening environment plummeted to 7.7 percent from 11.4 percent.

Consumers also were looking forward to an improved job market over the next six months. Those expecting fewer jobs to become available fell to 15.5 percent from 19.3 percent, although those anticipating more jobs to become available slipped slightly to 16.2 percent from 17.6 percent. Nevertheless, the proportion of consumers expecting their income to improve in the first six months of 2005 inched up to 20.7 percent from 19.2 percent.

The monthly survey by the board is based on a sample of 5,000 U.S. households. This month, consumers assessed their current conditions as significantly more favorable than last month. Those viewing business conditions as “good” increased to 24.4 percent from 23.2 percent, while those who said conditions were “bad” declined to 17.8 percent from 20.2 percent.

On the employment front, consumers who said jobs were “plentiful” rose to 19.4 percent from 17.1 percent, while those who claimed jobs were “hard to get” fell to 26.4 percent from 28 percent.

“The rise in confidence, which echoes other consumer surveys, corroborates our expectation that consumption growth would remain solid this quarter,” wrote Maury Harris, economist at UBS in a research note.

The economist noted the index at 102.3 is “neither exceptionally high nor low. It is consistent with an optimistic, but not overly exuberant, consumer sector.” He also noted that the expectations component correlates more closely with spending growth, and that it is at a level that “looks consistent with close to a 4 percent trend in real consumption growth.”

Economist Harris of UBS noted in his research report that gift cards now account for 5 to 10 percent of December store sales. He added that consumers likely will “redeem only about 25 percent of these cards by yearend, delaying sales.” Purchases made using gift cards are not reported until the cards are cashed.

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