Consumer confidence in the U.S. improved to its best level in six months during December but the state of consumers' finances still remains grim, the Thomson Reuters/University of Michigan Survey said on Thursday.
The survey's sentiment index reading showed that consumer confidence was at 74.5 in December, up from 71.6 in November, mainly due to improved employment expectations that made consumers more willing to spend and adopt more favorable prospects for the overall economy.
Consumer spending forms about 70 percent of GDP growth in the U.S, which was 2.6 percent in the third quarter.
Consumer spending rose 0.4 percent during November, the Commerce Department said in a separate report earlier on Thursday.
Whether this stronger consumption growth is sustainable, however, is still open to question, Paul Ashworth, an economist at Capital Economics, said in a note.
Households managed to pull off the savings by running down their saving rate to 5.3 percent of disposable income in November, from a recent peak of 6.3 percent in June, Ashworth said.
Consumers reported much more favorable news about recent changes in the job situation, and more frequently expected the unemployment rate to decline during the year ahead, the survey reported, indicating that high unemployment rate of 9.8 percent was not proving to be a complete deterrent for people to spend.
November and December form the peak holiday season in the U.S. when many people spend on Christmas gifts and such. Black Friday, the day after Thanksgiving, is considered on the biggest shopping events of the year and also marks the beginning of the holiday shopping season.
Reports about Black Friday sales had indicated that people were spending more in 2010 than the previous year and retailers hoped this trend would continue.
Many retailers such as Wal-Mart, Best Buy and Target offered massive discounts, both in their stores and online, to attract more customers.
Encouraged by the strong sales, some retailers are now trying to lure people away from the habit of spending only during discount sales.
While holiday sales benefited from the improvements recorded in the past two months, combined with the recent passage of the tax legislation, consumer spending can be expected to increase in 2011, the TR/Michigan Survey said.
Even as consumers are willing to spend and put on an optimistic face, the current state of consumers' financial situation remains grim, the survey added.
Most people have a negative view about their financial situations due to the widespread expectation of stagnant incomes.
Personal income rose 0.3 percent to $42.3 billion in November, even though savings dipped during the month, according to the government report.
However, the survey painted a different picture for December, stating that just 23 percent reported recent gains in their finances, unchanged from last December, as twice as many consumers reported income declines as income advances.
The majority of consumers anticipated no income increases during the year ahead, as they have for a record 24 consecutive months, the survey added.