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Consumer Confidence Soars: Inflation Fears Fade, Economic Future Brightens
Sharp Reversal in Sentiment
Consumer sentiment in the United States has undergone a dramatic turnaround, with a 13% surge in the University of Michigan’s index in December. This erases four months of decline and marks a 39% increase from the all-time low in June 2022. While the index remains below pre-pandemic levels, the shift in mood is undeniable.
Expectations Shift to Optimism
Key drivers of this change include:
Falling inflation expectations: Year-ahead inflation expectations have plummeted from 4.5% in November to 3.1% in December, the lowest level since March 2021. Improved outlook for the economy: Both the current and future expectations indexes saw significant increases, with the future expectations index surging by nearly 17%.
Broad Consensus Across Demographics
The improved sentiment is widespread, cutting across age, income, education, geography, and even political affiliation. Survey director Joanne Hsu noted, “There was a broad consensus of improved sentiment across all demographics.”
Potential Impact of Elections
Interestingly, Hsu also observed that “a growing share of consumers - about 14% - spontaneously mentioned the potential impact of next year’s elections.” This suggests that some consumers are anticipating election results favorable to the economy, further boosting their confidence.
Why the Sudden Shift?
This abrupt reversal in sentiment comes amid a backdrop of positive economic data, including:
Strong monthly jobs reports: Job growth has averaged above 200,000 per month for the past year, significantly higher than the pre-pandemic average. Declining inflation: The rate of inflation has fallen by about two-thirds from its peak last year, although it remains above pre-pandemic levels. Lower gas prices: The cost of gasoline has fallen steadily, dropping from $3.40 a month ago to $3.19 currently.
Experts Weigh In
Economists attribute the improved sentiment to several factors:
Falling inflation: “A falling rate of inflation finally caught traction in consumers’ outlook, probably led by dropping gas prices,” says Robert Frick, corporate economist at Navy Federal Credit Union. Lower cost of durable goods: “And as the price of durable goods falls, consumers are feeling better about the cost of things like appliances and electronics,” Frick adds.
Implications for the Fed and Markets
This improved outlook comes just before the Federal Reserve’s meeting next week, where they are expected to maintain current interest rates. However, the Fed’s future policy decisions will be closely watched, particularly in light of the changing consumer sentiment and upcoming economic projections.
Possible End to the Tightening Cycle?
Some analysts believe the Fed may signal a shift in policy, with James Solloway, chief market strategist at SEI Investments, stating, “We expect to see an announcement that the risks of inflation are now balanced, which suggests an end to the tightening cycle.”
Other Key Factors in the Inflation Picture
Falling apartment rents are another contributor to the improving inflation picture. According to Rent.com, the national median rent has declined from its peak in August 2022, suggesting a potential easing in housing costs.
A Soft Landing Ahead?
With multiple positive indicators and a shift in consumer sentiment, some economists are optimistic about the future. Gene Goldman, chief investment officer for Cetera Investment Management, predicts “the economy will actually glide into a soft landing,” citing factors like better stock valuations and anticipated interest rate cuts.
Overall, the dramatic rise in consumer confidence signifies a significant shift in the economic landscape. While challenges remain, the improved outlook suggests a potential for a more optimistic future.