Consumers haven’t felt this good about the economy since 2021: ‘December was no fluke’

Consumers haven't felt this good about the economy since 2021: 'December was no fluke'

The University of Michigan’s consumer sentiment survey for January has shown a significant 13% increase in overall sentiment, reaching a reading of 78.8. This marks the highest level since July 2021, surpassing economist expectations. The index has seen a cumulative 29% climb over the past two months, the largest two-month increase since the US economy recovered from the 1991 recession. The boost in sentiment aligns with the Nasdaq 100 reaching a new all-time high and major stock averages sitting near record levels. The shift in sentiment reflects a reversal from the consensus expectation of a recession at the start of 2023 to confidence in a soft landing for the economy, with improving views on inflation and income expectations.

The increase in consumer sentiment comes amid a broader shift in economic expectations, driven by a consensus call for a soft landing, where inflation returns to the Federal Reserve’s 2% target without a sharp economic downturn. Investors have shifted from fearing further interest rate hikes to debating when the first interest rate cut by the Federal Reserve will occur. The positive sentiment is reinforced by decreasing inflation expectations, with year-ahead expectations hitting 2.9%, the lowest since December 2020, and longer-run expectations falling to 2.8%. The improved outlook suggests that consumers are aligning their perceptions with strong economic data and signals a narrowing of the divergence between consumer sentiment and economic performance seen in the post-pandemic era.

Recent economic indicators have also portrayed a robust picture, with December retail sales exceeding expectations and building permits rising. Despite increased headlines about layoffs, the data on unemployment benefit claims hit its lowest weekly level since September 2022. The positive data has led to upward revisions in projections for fourth-quarter economic growth, and economists anticipate continued growth in 2024. Goldman Sachs chief economist Jan Hatzius expects the US economy to grow at an annualized rate of 2.3% in 2024, about 1 percentage point above the consensus call. Hatzius believes that continued upside surprises in the economy won’t alter the Fed’s plans for rate cuts, as the focus is on inflation returning to the target.