The Conference Board said Tuesday that its Consumer Confidence Index, which had dramatically increased in April, zoomed past economists' expectations to 54.9 from a revised 40.8 in April. Economists surveyed by Thomson Reuters were expecting 42.3. In February, confidence levels had hit a new historic low of 25.3.
The reading marks the highest in eight months when the level was 61.4. The levels are also closer to the year-ago's 58.1, though the widely watched barometer is still below 100, which indicates a healthy economy.
The Present Situation Index, which measures how shoppers feel now about the economy, rose to 28.9 from 25.5 last month. But the Expectations Index, which measures shoppers' outlook over the next six months, climbed to 72.3 from 51.0 in April.
Investors focused on the upbeat sentiment reading, shaking off a mostly downbeat report on the housing market, also released Tuesday. In midmorning trading, the Dow Jones industrial average rose 130.62, or 1.6 percent, to 8,407.94.
"Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months," Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement. "While confidence is still weak by historic standards, as far as consumers are concerned, the worst is now behind us."
The confidence report offered encouraging news to merchants,which are counting on consumers to be in the mood to spend after confidence plummeted to historic lows late last year but has been rising since March. A two-month stock rally has helped make shoppers feel a little better about their retirement funds, spurring dramatic rebounds in confidence in April and May levels.
Meanwhile, better-than-expected earnings results from such retailers as Sears Holdings Corp. and Gap Inc. have offered the latest evidence that spending has begun to stabilize, though overall business is still weak.
The size of the monthly increases in April and May in consumer confidence encouraged economists. Gary Thayer, chief economist at Wells Fargo Advisors, says that unless the economy suffers from major financial shocks, it looks like "we've turned the corner" on confidence.
"This is a significant change," said Thayer. "While (consumers) are unhappy about their job situation and their home values, they see light at the end of the tunnel." He added, however, sentiment has a way to go before shoppers go back to splurging. That can only happen when the job and housing markets, which have been holding down sentiment, start to turn around.
The latest report on home prices, released Tuesday, wasn't comforting. Home prices fell at the fastest annual rate on record in the first quarter, though the pace of month-to-month declines continues to slow, according to a closely watched housing index.
The Standard & Poor's/Case-Shiller National Home Price index reported home prices tumbled by 19.1 percent in the first quarter, the most in its 21-year history.
Home prices have fallen 32.2 percent since peaking in the second quarter of 2006 and are at levels not seen since the end of 2002.
Meanwhile, Americans continue to cut back on nonessentials like furniture while focusing on buying necessities as they worry about their jobs. The unemployment rate is expected to climb to 9.2 percent in May from 8.9 percent in April and employers are expected to shed a net total of 523,000 jobs, according to economists surveyed by Thomson Reuters. The Labor Department is expected to release unemployment figures on June 5.
The Consumer Confidence survey - whose responses were received through May 19 from a representative sample of 5,000 U.S. households - showed a marked improvement in consumers' outlook for jobs. The percentage of consumers expecting more jobs in the months ahead increased to 20.0 percent from 14.2 percent, while those anticipating fewer jobs declined to 25.2 percent from 32.5 percent. The proportion of consumers anticipating an increase in their incomes edged up to 10.2 percent from 8.3 percent.