The surge in U.S. household confidence propelled by a strengthening job market and lower fuel costs improves the odds that gains in spending will soon follow.

The University of Michigan preliminary consumer sentiment index for January rose to an 11-year high of 98.2, exceeding the median forecast of economists surveyed by Bloomberg, from a final reading of 93.6 the prior month, according to a report Friday. Other figures from government agencies in Washington showed consumer prices fell and manufacturing output cooled.

Increases in employment and a drop in gasoline prices were on the minds of more Americans this month than at any time in the more than five-decade history of the Michigan survey. Consumers also said they were more likely to buy a car, a sign that the December slump in retail sales may prove temporary.

“The economy is on a very solid footing beginning the new year,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose confidence forecast was the closest in the Bloomberg survey. “We continue to generate jobs at a fairly rapid clip, and what you’re also seeing is consumers’ response to what I call a tax cut from lower gasoline prices. That frees up a lot of spending and that means they can purchase other goods and services.”

 

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Stocks climbed, buoyed by the jump in confidence and gains in energy shares. The Standard & Poor’s 500 Index rose 1.3 percent to 2,019.42 at 2:51 p.m. in New York.

The median estimate in a Bloomberg survey of 70 economists projected the Michigan index would increase to 94.1. The median hasn’t been so far below the actual reading since March 2013. Forecasts ranged from 91 to 99.

Broad-Based Gain

The group’s current conditions index, which measures Americans’ assessment of their personal finances, and its measure of expectations six months from now both advanced.

“Gains in employment and incomes as well as declines in gas prices were cited by record numbers of consumers,” Richard Curtin, director of the Michigan Survey of Consumers, said in a statement. “More consumers spontaneously cited increases in their household incomes in early January than any time in the past decade.”

Such a marked firming in attitudes will be difficult to sustain, particularly if earnings don’t soon meet households’ expectations, said Curtin. Nonetheless, small setbacks wouldn’t prevent him from projecting consumer spending will rise about 3 percent this year, he said. That would be the biggest increase since 2006.

This month’s preliminary sentiment reading is the second-strongest since December 2000.

Retail Sales

If optimism about spending is to be sustained, purchases will need to soon recover from a December swoon. Retail sales dropped 0.9 percent last month following a 0.4 percent advance in November that was smaller than previously estimated, Commerce Department figures showed on Wednesday.

Americans expected an inflation rate of 2.4 percent in the next year, the lowest since September 2010, and down from 2.8 percent in December, the Michigan survey showed. The decrease reflected the drop in gasoline prices, said Curtin.

Over a longer term, five years to 10 years, they projected prices would rise 2.8 percent, the same as in the prior month.

The cost of living fell in December by the most in six years, reflecting the plunge in energy prices, other figures showed Friday. The consumer-price index dropped 0.4 percent, the biggest decline since December 2008, after falling 0.3 percent in November, according to the Labor Department.

Factory Production

Another report showed factory production cooled last month as capital spending and vehicle assemblies slowed. The 0.3 percent increase in output at manufacturers followed a 1.3 percent November gain that was the biggest in nine months, the Federal Reserve said.

While confidence had been slow to recover in the wake of the recession, job growth that’s finally picking up steam is probably supporting consumers’ outlooks.

Payrolls climbed by 252,000 workers in December following a 353,000 increase the prior month, and the jobless rate declined to 5.6 percent, the lowest level since June 2008, Labor Department figures released Jan. 9 showed. Wage growth remained meager, with average hourly earnings rising just 1.7 percent in the 12 months ended December, the least in two years.

The cheapest gas in more than five years is expected to lift consumers’ spirits by helping stretch paychecks a little further. The price of a gallon of regular gasoline was $2.08 on Jan. 15, the lowest level since May 2009, according to U.S. auto group AAA.

Consumer ‘Positives’

“The main positives for consumer sentiment have been an improving labor market and falling gasoline prices,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York and the top-ranked forecaster of consumer sentiment according to data compiled by Bloomberg. “Beyond that, subdued inflation in general is probably also helping consumers feel a little bit better about buying conditions.”

Declines in the cost of living have helped boost paychecks. Hourly earnings adjusted for inflation rose 0.1 percent in December, after a 0.6 percent increase the prior month, a separate report from the Labor Department showed. They were up 1 percent over the past 12 months, the most since February.

Low oil prices and wage growth are bolstering the outlook for companies such as Wells Fargo Co. (WFC), the largest U.S. home lender.

“There have been many signs of strength in the U.S. economy,” Chief Executive Officer John Stumpf said on a Jan. 14 earnings call. “I don’t think this is a breakout, but I think we’re on our front foot and consumers’ confidence is at an all-time high since the downturn. So the way I read the tea leaves, I am optimistic.”

To contact the reporter on this story: Victoria Stilwell in Washington vstilwell1@bloomberg.net

To contact the editors responsible for this story: Carlos Torres at ctorres2@bloomberg.net