Economy picking up as consumers turn bullish

The economic outlook is brightening, with consumer confidence soaring to nearly a seven-year high this month and a report Wednesday that's expected to show a solid rebound in growth after a weather-battered first quarter.

Amid the encouraging news, the Federal Reserve Wednesday is expected to continue to wind down bond purchases aimed at holding down long-term interest rates and stimulating the economy. Analysts expect monthly purchases will drop to $25 billion from $35 billion. The program is scheduled to end in October.

"I think we're making steady progress in getting to the point where the economy is going to take off," says Joel Naroff, of Naroff Economic Advisors.

The Conference Board said its closely watched index of consumer confidence jumped to 90.9 in July from 86.4 in June. The reading, the highest since October 2007, was largely fueled by strengthening job gains and a stock market rally, says economist Chris Christopher of IHS Global Insight.

Also, he says, gasoline and food prices have stabilized after rising sharply in the spring. Christopher says the growing optimism should help bolster the critical back-to-school sales season.

Economists estimate the government will report Wednesday that the nation's gross domestic product increased at a 3% annual rate in the quarter ended June 30 after falling 2.9% in the first quarter. That was its worst showing in five years.

Consumer spending and business investment both likely accelerated as the harsh winter weather faded, says Paul Dales of Capital Economics. And, he says, recent data indicate that businesses restocked at a faster rate after a sharp slowdown early this year.

The economy isn't booming. Early this year, many economists had projected second-quarter growth closer to 4%, citing catch-up effects from the bad weather and households splurging amid reduced debt levels and increased wealth.

Surging auto sales aside, Christopher says many middle-income Americans continue to spend cautiously because average annual wage gains remain stuck at 2%, barely enough to keep pace with inflation. Like many economists, he expects wage growth and consumer spending to pick up in the second half of the year.

Also holding back more robust economic growth is a housing recovery that has slowed significantly this year, in part because of higher home prices and mortgage rates.

The Standard & Poor's Case Shiller index on Tuesday showed that average home prices in 20 large cities were up 9.3% in May from a year ago — the smallest annual gain in more than a year. Analysts say the moderating housing costs are actually good for the market, helping make homes more affordable and pulling in more buyers.