The Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to 83.7, the highest since July 2007, from 76.4 in April, a report Friday showed. Separately, the Conference Board's gauge of the economic outlook for the next three to six months climbed 0.6 percent in April, more than forecast.
The gain in confidence shows Americans are overcoming the effects of higher taxes and a package of federal spending cuts, known as sequestration, that threatens to take a toll on jobs. Stocks rallied as the reports underscored forecasts for a pickup in the economic expansion later this year.
"As fiscal drag fades in the second half of the year, the case can be made that overall growth is going to accelerate," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, N.Y., and the top forecaster of consumer sentiment in the past two years, according to data compiled by Bloomberg. The gain in confidence "is testimony to underlying growth in spending power."
Another report from the Labor Department Friday showed payrolls climbed in 30 states in April, while the unemployment rate dropped in 40, showing the labor market strengthened across the country.
Friday's U.S. data alleviated concern the world's largest economy will keep slowing after reports this week showed industrial production declined more than forecast in April and first-time claims for unemployment benefits increased last week.
The Michigan survey follows a Bloomberg measure of consumer outlook, which improved in May to its best reading in five months. The Bloomberg consumer economic expectations gauge, released monthly, rose to minus 1 from minus 4 in April.
The Michigan gauge was forecast to climb to 77.9, according to the median forecast in a Bloomberg survey. The index averaged 64.2 during the recession that ended in June 2009 and 89 in the five years prior.
Rising consumer optimism is good news for retailers including Wal-Mart, Kohl's and OfficeMax, which have reported that customers remain cautious.
At OfficeMax, a retailer of business supplies based in Naperville, Ill., Chief Executive Officer Ravi Saligram said customers are being pinched by tax increases.
"We believe uncertainty related to cuts in public sector spending associated with the sequestration, the payroll tax hike and changes in health-care laws have meaningfully impacted customer behavior," Saligram said on a May 7 earnings call.
The Michigan survey's current conditions index, which takes stock of Americans' view of their personal finances, rose to 97.5 in May, the highest reading since October 2007, from 89.9 last month. The index of expectations six months from now rose to 74.8 from 67.8 in April.
The increase in the leading index followed a revised 0.2 percent drop in March and beat the median forecast of economists, which called for a 0.2 percent gain.
Seven of its 10 components contributed to the increase, including a jump in building permits and the widening interest- rate spread between a federal funds rate and 10-year Treasury notes.
"The biggest risk right now is the adverse impact of cuts in federal spending," Ken Goldstein, an economist at the Conference Board, said in a statement. "The biggest positive factor is the potential for improvement in the recovering housing and labor markets."
Higher home prices have boosted household wealth. Residential real-estate prices rose in February by the most since May 2006, with the S&P/Case-Shiller index of house values in 20 cities up 9.3 percent from a year ago.
The economy is projected to grow at a 1.6 percent annual rate in the second quarter, down from a 2.5 percent annual rate in the first three months of the year, based on the median forecast in a Bloomberg economist survey from May 3 to May 8. The expansion is then projected to accelerate to a 2.6 percent pace in the fourth quarter.
Part of the reason for the projected second-quarter slowdown is an increase in the levy used to finance Social Security, which returned to 6.2 percent from 4.2 percent. A worker earning $50,000 a year is taking home about $83 less a month as a result.
Our new comment system is not supported in IE 7. Please upgrade your browser here.