Surprise: Americans are starting to feel better about the economy and inflation

Much has been made about how Americans feel bad about the state of the economy, even though according to many broad-based statistical measures things are pretty good.

It looks like that message has sunk in to some extent, as a widely followed reading of consumer opinion jumped in December and ended a four-month streak of declines.

The University of Michigan said Friday that its consumer sentiment index jumped 13% to 69.4, as people became less worried about inflation and more optimistic about a number of issues. That not only ended the downturn but reversed the decline, returning the sentiment index to where it was in August.

Quincy Krosby, chief global strategist for LPL Financial, wrote that the reading shows "a more optimistic view of economic conditions, which suggests that coupled with a stronger than expected payroll report, helps underpin the narrative of a still resilient economy."

The report was a surprise to experts as well. Economists surveyed by Dow Jones Newswires and The Wall Street Journal thought sentiment would inch higher to 62.4 from November's reading of 61.3, but the metric jumped instead.

"There was a broad consensus of improved sentiment across age, income, education, geography, and political identification," said Surveys of Consumers Director Joanne Hsu. Year-ahead inflation expectations plunged from 4.5% last month to 3.1% this month. The current reading is the lowest since March 2021.”

Consumers generally haven’t felt great about the economy. They’ve been concerned about the possibility of a recession, which experts discussed a great deal in 2022 and 2023 even as the economy held up, and they’re feeling the continued effects of the inflation of the last few years along with other factors like rising credit card debt and the high cost of housing.

Inflation has been slowing for months and the job market has stayed strong, with wages for workers rising. And spending by consumers has stayed strong, which is a major reason there hasn't been a recession. It's possible that some of that sunk in this month.

The sentiment index is calculated based on surveys of Americans with questions about their current views on categories like inflation, personal finances and business conditions, as well as their expectations of how those things will change. Because consumer spending accounts for about 70% of the U.S. economy, the sentiment index is considered an important indicator of how much they are willing to spend and what the trajectory of the economy might be.

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The recent dip in consumer sentiment was, among other things, a possible warning sign about holiday spending this year.

For comparison, the consumer sentiment index stood at 99.3 in December 2019, before the Covid-19 pandemic took hold. It hit an all-time low of 50.0 in June 2022, when inflation was at a 40-year high.

The index's all-time high was 112.0 in February 2000, at the height of the dot-com bubble of that era.

Hsu's statement added that many respondents mentioned they felt better about the economy because they're optimistic about elections in 2024.

In recent years, consumer sentiment has been split along partisan lines: when a Democratic president is in office, Democrats feel much better about the economy than Republicans do, and vice versa. So it's possible that many of the people surveyed were optimistic about the elections even though they're hoping for opposite outcomes.