By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer confidence increased in June to the highest level in nearly 1-1/2 years amid renewed labor market optimism, while business spending appeared to hold up in May, indicating the economy remained on solid footing despite fears of a recession.
Hopes that the economy could avoid a downturn in the near-term were also bolstered by other reports on Tuesday signaling a housing market revival was likely underway, with new home sales racing to a 15-month high in May and monthly house prices rising again in April.
The upbeat data, however, suggested the Federal Reserve will likely have to continue raising interest rates to slow demand in the overall economy. The U.S. central bank, which has raised its policy rate by 500 basis points since March 2022, signaled this month that two additional rate hikes were warranted this year.
"The U.S. economy continues to steadily defy expectations and the fact that it is doing so without lots of hoopla is a good thing," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.
The Conference Board said its consumer confidence index rose to 109.7 this month, the highest reading since January 2022, from 102.5 in May. Economists polled by Reuters had expected the index to climb to 104.0.
Consumers under the age of 35, and those with an annual income of more than $35,000 were the main drivers of confidence this month. Consumers, however, continued to expect a recession at some point over the next six to 12 months.
But they grew more upbeat on the labor market, with the share viewing jobs as "plentiful" rising and the proportion of those saying jobs were "hard to get" falling.
The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, rose to 34.4 from 30.7 in May, a sign labor market conditions remain tight despite first-time applications for state unemployment benefits hovering at more than 1-1/2-year highs. This measure correlates to the unemployment rate in the Labor Department's closely followed employment report.
Though income expectations eased a bit, consumers were generally optimistic about family finances.
"This might reflect consumers' belief that labor market conditions will remain favorable and that there will be further declines in inflation ahead," said Dana Peterson, chief economist at The Conference Board in Washington.
Consumers' 12-month inflation expectations dipped to 6.0%, the lowest reading since December 2020, from 6.1% last month. The improvement in confidence mirrored the University of Michigan's sentiment survey.
But consumers' buying plans softened, with fewer households intending to purchase motor vehicles, major appliances and houses over the next six months. Vacation was also not on many consumers' minds. But economists cautioned there was no strong correlation between buying plans and consumer spending.
U.S. stocks were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury prices fell.
FLOOR FOR HOUSING
The run of positive economic news was extended by a separate report from the Commerce Department showing orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 0.7% in May. The rise in orders for these so-called core capital goods handily beat economists' expectations for them to be unchanged.
Though a downward revision to April's increase to 0.6% from 1.3% took some of the shine from the data, business spending was holding up despite the pain from higher borrowing costs. There were notable increases in orders for electrical equipment, appliances and components as well as machinery.
Shipments of core capital goods gained 0.2% in May after climbing 0.4% in April. Nondefense capital goods shipments including aircraft surged 3.4%. These feed into the calculation of equipment spending in the gross domestic product measurement.
Business spending on equipment has declined for two straight quarters, the first back-to-back decline since 2020.
"We may not be out of the woods yet, but back-to-back gains in core capital goods orders more broadly point to a potential bottoming out in spending and upside for second-quarter equipment spending," said Tim Quinlan, a senior economist at Wells Fargo (NYSE:WFC) in Charlotte, North Carolina.
The housing market appears to have found a floor and could even be recovering. A third report from the Commerce Department showed new home sales jumped 12.2% to a seasonally adjusted annual rate of 763,000 units last month, the highest level since February 2022, benefiting from a dearth of previously owned homes available for sale.
Economists had forecast new home sales, which account for a small share of U.S. home sales, slipping to a rate of 675,000 units. Sales shot up 20.0% on a year-on-year basis in May. New home sales are counted at the signing of a contract, making them a leading indicator of the housing market.
While new home sales can be volatile on a month-to-month basis, they added to data last week showing homebuilder confidence positive in June for the first time in 11 months. Housing starts surged in May and home resales edged up.
A fourth report from the Federal Housing Finance Agency showed monthly house prices rising 0.7% in April after gaining 0.5% in March. Prices increased 3.1% in the 12 months through April after advancing 3.7% in March.
"Strength in housing suggests risks for the Fed's goal of a return to 2% inflation over the medium term," said Veronica Clark, an economist at Citigroup (NYSE:C) in New York. "Housing strength over the summer also supports our base case of further rate hikes sooner rather than later."