Growing optimism about the economic outlook, confidence that inflation will decline, and good sentiment about the current situation have fueled a sharp rise in U.S. consumer sentiment as the new year begins.
The University of Michigan Consumer Confidence Index rose 9.1 points to 78.8, the largest monthly increase since 2005. This followed a strong rise in December. Sentiment has risen 29% in the past two months, the biggest two-month increase since 1991.
Preliminary results for January not only beat consensus expectations, but also beat even the most bullish forecasts.
“For the second month in a row, all five index components rose, with short-term economic outlook up 27% and current personal finance up 14%,” said Joan Hsu of the University of Michigan.
Consumer sentiment has been depressed throughout the Biden administration and has never recovered from the sharp decline following the onset of the pandemic. Indeed, far from improving sentiment as growth recovers and the economy reopens, inflation takes hold and many of Biden's promises on growth and prosperity are seen as fig leaves hiding handouts to leftist interest groups. It began to decline sharply a few months after President Biden took office. .
Although it has improved recently, sentiment is 7 percent below the historical average since 1978 and 21 percent below pre-pandemic levels in January 2020. The latest reading is about the same level as when Biden took office in January 2021.
Sentiment is rising among Republicans as hopes for an improvement in the economy increase, perhaps increasing the chances of Donald Trump defeating Biden in the presidential election later this year. It is thought that they are related. At the same time, Democrats' partisan habit of praising the economy during Democratic presidents remains strong, and many Democrats cling to the belief that Biden will be reelected.
“Democrats and Republicans alike have given their most favorable outlook since the summer of 2021,” Suh said.
Inflation expectations continued to decline, falling to 2.9% next December from the expected 3.1%. Consumers expect inflation to average 2.8% over the next five to 10 years, the lowest expected pace in four months.
The Federal Reserve is likely to take comfort in lower inflation expectations, but rising consumer confidence could boost growth as its interest rate cut plans hinge on a slowing economy.
“Sentiment is now nearly 60% above the record low measured in June 2022, which is likely to provide positive momentum for the economy,” Su said.
