Quick Bites | Americans more upbeat about the economy

One of the investment market puzzles of last year was that despite surprisingly resilient economic fundamentals, consumer sentiment remained depressed. That has now changed. Consumer sentiment in the US surged 29% since November in the biggest two-month increase since 1991.

Consumer sentiment leapt 13% in the first half of January from December, according to a University of Michigan survey, after a sharp rise the prior month. The pickup in sentiment was broad-based, spanning consumers of different ages, income, education and geography.

Source: The Daily Edge 


Changes include that inflation is cooling, while mortgage rates are down from last year. Consumers’ expectations for inflation a year ahead dropped to 2.9% in January, the lowest level since December 2020, and down from 4.5% in November, according to the Michigan survey.

Media coverage might be rubbing off on consumers, too. The mood of economy-related articles has rebounded since November to the highest level since 2018, according to the San Francisco Fed’s Daily News Sentiment Index. Coverage had skewed much more negatively in the past three years relative to economic fundamentals, a Brookings Institution analysis found. But this is now shifting, particularly with share markets hitting new highs and expectations of recession all but disappearing.

Income expectations are on the rise as well. When asked, “What do you think is the per cent chance that your income in the next twelve months will be higher than your income in the past twelve months?” 60% responded ‘yes’. Not only does this mark the largest share on record in data going back to the early 2000s, but as long as consumers think their income will be higher, so too will their spending.

Petrol prices have declined in January with the average price of a gallon of gas down about $0.10 to $3.01 from the start of the month. As prices at the pump are one of the most visible measures of the cost of living to US consumers, it is a major driver of month-to-month movement in inflation expectations. The decline in gas prices since mid-2023 is affecting how consumers feel about the cost of living, and this in turn affects how consumers feel about the economy more broadly.

But it is prudent to take big swings in sentiment with a degree of caution. Despite how they “feel” about their income prospects, the labour market is losing momentum. And reality may fall short of the hopes that have taken hold in terms of income expectations. Also, if consumers rush out and spend more, the increased demand could cause the trend decline in inflation to slow or even reverse course. Nevertheless, on balance, an improved mood amongst consumers in the US is definitely good news.



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