Rising optimism about the prospects for the economy, confidence that inflation will decline, and better feelings about current conditions fueled a sharp rise in U.S. consumer sentiment as the new year began.
The University of Michigan’s consumer sentiment index surged 9.1 points to 78.8, the largest monthly increase since 2005. This followed a big increase in December. Over the last two months, sentiment rose 29 percent, the largest two-month increase since 1991.
The preliminary January reading not only surpassed the consensus estimate, it was stronger than even the most bullish estimates.
“For the second straight month, all five index components rose, with a 27 percent surge in the short-run outlook for business conditions and a 14 percent gain in current personal finances,” said the University of Michigan’s Joanne Hsu.
Consumer sentiment has been depressed throughout the Biden administration, never recovering from the sharp drop after the pandemic hit. Indeed, instead of improving as growth returned and the economy reopened, sentiment began falling sharply a few months into Biden’s presidency as inflation took hold and many of Biden’s promises of growth and prosperity came to be seen as fig-leafs concealing handouts to leftwing interest groups.
Even with the recent improvement, sentiment is 7 percent below the historical average since 1978 and 21 percent lower than the prepandemic level of January 2020. The latest reading is about even with where it was when Biden was sworn in as president in January of 2021.
Sentiment has been boosted by a rise in hope among Republicans for economic improvement, most likely linked to the increasingly likely prospects that Donald Trump will defeat Biden in the presidential election later this year. At the same time, the partisan habit of Democrats of praising the economy during Democrat presidencies remains strong and many Democrats cling to the belief that Biden will win re-election.
“Democrats and Republicans alike showed their most favorable readings since summer of 2021,” Hsu said.
Expectations for inflation continued to decline, falling to 2.9 percent over the next year from expectations for 3.1 percent in December. Over the next five to 10 years, consumers expect inflation to average 2.8 percent, the slowest expected pace in four months.
While the Federal Reserve is likely to take comfort in falling inflation expectations, surging consumer sentiment could boost growth at a time when plans to decrease interest rates hinge on the economy slowing.
“Sentiment has now risen nearly 60% above the all-time low measured in June of 2022 and is likely to provide some positive momentum for the economy,” Hsu said.
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