Consumer sentiment surges as inflation news brightens year-end economic outlook

In a year-end revelation, the University of Michigan’s consumer sentiment survey for 2023 unfolds as a positive economic Christmas card for the United States.

The university’s consumer sentiment index experienced an impressive 14% surge in December, surpassing the earlier estimate, fueled by the latest inflation data indicating significant progress towards the Federal Reserve’s 2% annual target.

Survey director Joanne Hsu emphasized the substantial improvements in consumer perceptions of inflation, noting the index’s climb to 69.7, marking a reversal from four consecutive months of declines. Hsu highlighted that all five index components registered an increase, a phenomenon observed in only 10% of readings since 1978. The surge in expected business conditions, with a rise of over 25% for both short and long terms, was a noteworthy aspect, cutting across various demographic and socio-economic groups.

This optimistic release follows Friday’s inflation report, revealing a 0.1% dip in prices for November, resulting in an annual rate of 2.6%, down from October’s 2.9%. This aligns with the Federal Reserve’s desired trajectory for inflation.

Described as a “perfect soft-landing report” by Richard de Chazal, a macro analyst at William Blair, the data portrays a resilient U.S. consumer, supported by a robust labor market and steady wage gains. The economy, as evidenced by the 4.9% GDP growth in the third quarter, exceeds expectations for the year’s end. Despite projections of a slowdown in 2024, the prevailing consensus suggests a mild downturn or no recession.

Factors such as falling gasoline prices, a strong labor market, and income gains contribute to an optimistic consumer outlook entering 2024. Damian McIntyre, vice president, portfolio manager, and senior quantitative analyst at Federated Hermes, notes that inflation is normalizing faster than anticipated, reinforcing the likelihood of a soft landing.

However, amidst the positive news, Friday’s data showed a 12.2% decline in new home sales, dropping to 590,000 from October’s revised 672,000 pace. Despite this dip, the figure remains 1.4% higher than a year ago. Home prices rose to $434,700 from $409,300 in the past month, a fluctuation attributed to the mix of homes sold during the period.