US consumer sentiment surged in January 2023 to its highest level since July 2021, according to the preliminary release of the University of Michigan’s index of consumer sentiment. The index jumped 12.5% from December 2022, dramatically exceeding economists’ expectations. The sharp rebound in sentiment suggests Americans are beginning to feel more optimistic about the economy and inflation outlook.
Sentiment Index Hits 15-Month High
The consumer sentiment index rose to 78.8 in January, up from 70.2 in December and well above economists’ consensus estimate of 70.0 (CNN, NBC). January’s reading is the highest since July 2021 and reverses several months of declines stemming from high inflation and interest rate hikes. The index remains below pre-pandemic levels but has recovered significantly from mid-2022 lows.
“The Sentiment Index is now higher than in any month since Biden took office and 16 points above the all-time low last June,” noted chief economist Richard Curtin (WSJ).
Americans More Upbeat on Finances and Economy
Two components make up the overall consumer sentiment index – consumers’ assessment of current economic conditions, and their expectations for the future. Both components saw strong gains in January.
The subindex tracking views on current conditions rose from 59.4 to 72.6, while the expectations index surged from 65.6 to 80.3 (Yahoo Finance). Consumers are feeling better about both their current personal finances and the overall economy.
In particular, the number of consumers saying they are better off financially than a year ago hit 35%, the highest since 2002. The percentage expecting good times for businesses also hit record levels (NBC).
| Category | Dec 2022 | Jan 2023 | Change |
|---|---|---|---|
| Overall Sentiment Index | 70.2 | 78.8 | +12.5% |
| Current Conditions Index | 59.4 | 72.6 | +22.2% |
| Expectations Index | 65.6 | 80.3 | +22.4% |
Table shows month-over-month changes in key consumer sentiment indexes. (Sources: University of Michigan, CNBC, Yahoo Finance)
Inflation Expectations Moderate
Alongside greater optimism about current conditions, consumers’ outlook for inflation also improved notably. Survey respondents expect prices to rise just 2.9% over the next 5-10 years, down from 3.2% in December and the lowest reading since April 2021 (CNBC).
Moderating inflation has likely boosted consumers’ purchasing power and finances. Falling prices for goods like gas and used cars have eased cost of living pressures. This means consumers have more discretionary income even amid a potential recession.
“Buoyed by strong job growth and shrinking inflation, consumers are ready and willing to continue powering economic growth in 2023,” said Curtin.
Outlook Remains Uncertain Despite Gains
January’s sentiment rebound marks a strong start to 2023, but risks still cloud the outlook. Interest rates remain high after aggressive Federal Reserve policy tightening, weighing on housing and other interest-rate sensitive sectors (US News).
Additionally, layoffs have picked up, particularly in technology and finance, and could spread to other sectors. If unemployment rises substantially, it would likely dent consumer spending and sentiment.
However, the University of Michigan report indicates consumers may be looking through short-term headwinds at the moment. The revival of optimism underscores the resilience of the US economy and suggests demand is re-accelerating.
Sentiment Bounce Boosts Markets
The better-than-expected University of Michigan release fueled stock market gains on January 19th. The Dow Jones Industrial Average rose over 200 points, or 0.6%, following the report (MarketWatch).
Technology shares led the market higher, with Apple and Microsoft both climbing nearly 2%. The report’s indication of reviving consumer demand bolstered investors’ appetite for growth stocks.
Bonds also rallied on the inflation outlook. The 10-year US Treasury yield, which moves opposite price, dipped 3 basis points to 3.40% as investors pared back rate hike expectations.
Conclusion
Consumer sentiment staged a sharp rebound in January after sinking for much of 2022. Americans grew more upbeat about current conditions and future prospects as inflation moderated. Lingering risks temper the outlook, but strengthening sentiment points to solid consumer spending early in 2023.
Sustained demand from resilient households could support corporate profits and extend the economic expansion. However, additional sentiment gains likely hinge on a healthy jobs market and further tapering of price pressures.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
