U.S. consumer confidence rose more than expected in December 2023 to its highest level since July, lifted by easing inflation concerns, declining gas prices, and improving business conditions and employment landscape. The upbeat data signals consumers are feeling better about opening their wallets heading into 2024.
Confidence Index Hits 110.7, Well Above Forecasts
The Conference Board reported Tuesday that its consumer confidence index climbed to 110.7 this month, up from 102.2 in November and well above economists’ expectations of 104.0, according to a Reuters poll.
The December figure represents a 5-month high and the largest single-month gain since April 2021. Lynn Franco, senior director of economic indicators at the Conference Board, stated:
“Consumer confidence improved sharply in December, following back-to-back monthly declines. The Expectations Index is at its highest level since February, driven solely by waning inflation concerns. Whileconsumers are ending 2022 in a better mood, their confidence is still vulnerable to reversals, should inflation accelerate again.”
Table 1: Key Consumer Confidence Figures
| Metric | November 2023 | December 2023 | Change |
|---|---|---|---|
| Consumer Confidence Index | 102.2 | 110.7 | +8.5 |
| Present Situation Index | 137.4 | 147.4 | +10.0 |
| Expectations Index | 75.4 | 83.6 | +8.2 |
Both the present situation and expectations components showed strong improvement. The present situation index, which gauges consumers’ assessment of current business and labor market conditions, jumped 10 points to 147.4. The expectations index, measuring short-term outlook for income, business and job market conditions, also rose 8.2 points to 83.6. This marked a 10-month high.
Gas Prices, Jobs Market Provide Tailwinds
The robust confidence numbers for December come despite high inflation and the expectation that interest rates will remain elevated for some time. However, the 40% drop in gas prices from their summer peak is putting more money in consumers’ pockets. At the same time, strong job growth, improved wages and plentiful opportunities are encouraging households to continue steady spending despite economic uncertainties.
Chief U.S. economist at Oxford Economics, Nancy Vanden Houten, commented:
“The labor market is on very solid ground and lower gasoline prices are providing an important tailwind. Consumers are well positioned to keep the economy on a moderate growth path even as the Fed continues to raise rates.”
The U.S. economy added 263,000 jobs in November, while the unemployment rate held at 3.7% – near a 50-year low. Average hourly wages also rose 0.6% for the month and are up 5.1% over the past year. This suggests that despite high prices, consumers generally have job security and growing incomes to maintain steady spending.
Retail Sales Also Point to Resilient Shoppers
In further positive signs, retail sales have also been better than anticipated over the holiday shopping season so far. Mastercard SpendingPulse reported that retail sales rose 7.6% from Nov. 1 through Dec. 24, the highest growth rate in nearly two decades. E-commerce saw more modest 2.3% growth as shoppers returned to physical stores.
“It’s been a resilient holiday season with more holiday cheer than feared,” noted Sarah House, senior economist at Wells Fargo.
Cyber week saw particularly strong gains this year, with online spending jumping 4.2% compared to 2021. Shoppers are being strategic in their spending, taking advantage of discounts and shifting toward more experiences like travel rather than material goods. Lower income consumers also benefited from a robust job market.
“Employment continues to be strong for lower-income families, allowing them to fully participate in this year’s holiday season,” House said.
Inflation Expectations Decline Further
On inflation, the percentage of consumers expecting higher prices a year from now fell again to 9.6%, the lowest reading since April 2021. Despite high costs, inflation expectations have retreated significantly since peaking at 13.2% in June. This coincided with sharp declines in gas prices over the summer and fall.
While consumers may get some break at the gas pump, costs for food and rent are still elevated. Supply chain bottlenecks also continue to put upward pressure on prices. However, if energy prices remain contained and the Fed manages to cool demand substantially without severely slowing the economy, there is hope inflation will return close to the central bank’s 2% target by 2024.
Income and Jobs Outlook Most Favorable Since Feb.
Consumers’ optimism about their future earnings potential also improved by the widest margin in 10 months. The share of survey respondents expecting their incomes to increase over the next six months jumped to 19.4%, the highest since February.
Views on whether jobs are “plentiful” also shot up by the most in 11 months, reflecting a still-resilient labor market. The Fed’s continued interest rate hikes and resulting economic slowdown have not yet translated into significant job losses or household financial stress.
Consumers Well-Positioned Despite Uncertainties
While higher borrowing costs and prices are headwinds to spending, the overall takeaway from the strong confidence numbers is that consumers are better positioned financially heading into 2024. Assuming the Fed can tame inflation without severely hampering the jobs market, the economic expansion looks set to continue, albeit at a more moderate pace.
Chief U.S. financial economist at Oxford Economics, Kathy Bostjancic, said households have around $2 trillion excess in savings stockpiled during the pandemic, giving them a buffer:
“The fundamentals of strong job growth, rising wages and plentiful savings will enable consumer spending to grow about 1.5% in 2023.”
This resilient pace should be sufficient to keep the longest U.S. expansion on record going despite the Fed’s restrictive stance.
Outlook for Additional Rate Hikes in 2023
The central bank raised rates again last week by 50 basis points to a target range of 4.25% to 4.5%, stepping down from the faster 75 basis point hikes implemented earlier in 2022. Markets are pricing in an eventual peak rate of around 5% by May 2023.
While higher rates will squeeze household budgets further, policymakers noted that “recent developments point to modestly softer readings on spending and production” which could help restore balance between the economy’s supply and demand. This rebalancing is needed to bring inflation back in check sustainably.
Most Fed officials forecast rates reaching 5% to 5.25% next year before cuts happen in 2024 to support growth. The latest consumer figures add evidence that while economic activity is moderating, demand remains fairly steady, necessitating a higher terminal rate.
Oxford Economics’ Nancy Vanden Houten said:
“The better-than-expected read on consumer confidence supports the Fed’s expectation of moving the funds rate above 5% early next year and keeping it there for some time in order to ensure inflation continues to move back toward 2%.”
Cautious Optimism for 2023, Risks Remain
In conclusion, while consumers are feeling better equipped to maintain spending amidst inflation risks, warning signspersist in the form of still high prices and borrowing costs. Much will depend on how skillfully the Fed executes its tricky task of curbing demand sufficiently to lower inflation sustainably without severely damaging the jobs market or sparking a recession.
For now, households look poised to buoy economic growth at a more moderate, likely sub-2% pace in 2023. But any upside surprises on inflation or tighter credit conditions resulting in mass layoffs could quickly undermine confidence and spending. Continued declines in gas prices and inflation relief on other everyday costs will be key to prevent any backslide.
Overall the upbeat December consumer figures provide hope that with prudent policymaking, slowing but still-steady consumer demand can foster a soft landing in 2023. But risks remain until inflation is convincingly tamed, allowing the Fed to relent on interest rates and reassuring consumers that cost pressures are firmly on a downward trajectory.
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