Feeling better

The University of Michigan consumer sentiment soared 13% in January, proving that the sharp increase in December was no fluke. Driving this gain were strengthening income expectations and confidence inflation has turned a corner. The improvement was broad-based—across age, income, and education—and in outlook for business conditions and personal finances. Year-ahead inflation expectations have fallen to 2.9%, and longer-term declined to 2.8%. Both are slightly above pre-pandemic levels, but a far cry from recent history. 

Contributing to consumers’ improved outlook are perceptions of easing price pressures for durable goods and vehicles, and expectations that the Federal Reserve will reduce interest rates in 2024. Consumers are also optimistic about the job market: less than one-third expect the unemployment rate to rise in the year-ahead, contributing to their awareness of their economic prospects. 

Economic data released last week generally support this strong consumer. Weekly jobless claims fell from 203,000 to 187,000, not far from the record low of 162,000 reached in 1968. December retail sales were far stronger than expected, rising 0.6%, even as those for the prior two months were revised higher. The so-called core sales, which exclude volatile autos, building materials and gasoline sales, rose 0.8%, after a 0.5% gain in November. So, consumers are increasingly sanguine about their condition and the future, though there is still some way to go to recapture pre-pandemic level of confidence. 

All this good news shaved some market optimism on Fed rate cuts, as did speeches by Fed governors. Optimism is a good thing, but too much can lead to excessive risk-taking. The next Fed meeting on January 31 should help reset market expectations.