Consumer Sentiment Surges at Year End on Better Inflation News

Consumer Sentiment Surges at Year End on Better Inflation News

US & Canada

The university’s consumer sentiment index soared 14% in December – even better than the earlier estimate a couple weeks ago – as consumers reacted to the latest data on inflation that shows it making substantial progress toward the Federal Reserve’s 2% annual target.

“These trends are rooted in substantial improvements in how consumers view the trajectory of inflation,” survey director Joanne Hsu said of Friday’s release showing the index reaching 69.7 and reversing four months of declines.

“All five index components rose this month, which has only occurred in 10% of readings since 1978,” Hsu added. “Expected business conditions surged over 25% for both the short and long run. All age, income, education, geographic, and political identification groups saw gains in sentiment this month. The index is now just shy of the midpoint between the pre-pandemic reading and the historic low reached in June 2022.”

The release follows Friday’s earlier release of an inflation reading that showed prices actually dipped by 0.1% in November and fell to an annual rate of 2.6%, down from October’s 2.9% pace. It’s the latest data showing inflation is receding in line with the Fed’s desires.

“This was the perfect soft-landing report,” said Richard de Chazal, macro analyst at William Blair. “It shows a U.S. consumer that continues to hold up quite well, supported by the strong labor market and further solid wage gains. In addition, inflation is well on its way to 2% seemingly without stalling at the last mile as has been feared. While it is too early to declare victory just yet, it is consistent with market expectations for an accelerated schedule of rate cuts.”

On Thursday, gross domestic product for the third quarter came in at 4.9%, a revision from earlier estimates of 5.2% but still very high by recent comparisons. The economy is ending 2023 far better than anyone expected at the start of the year. Although many economists and the Fed see the economy slowing next year, the consensus view appears to favor no recession or, if there is one, a mild downturn.

Falling gasoline prices, a strong labor market and income gains are leaving consumers in a better frame of mind than earlier this year, a good omen entering into 2024.

“Inflation is normalizing faster than expected,” said Damian McIntyre, vice president, portfolio manager and senior quantitative analyst at Federated Hermes. “The job market is strong and the economy continues to grow at a steady rate. This increases the odds of a soft landing.”

If there was one sour note Friday, it was that new home sales fell to 590,000, a 12.2% drop from October’s revised 672,000 pace. However, the number was 1.4% above a year ago. Prices, meanwhile, rose to $434,700 from $409,300 a month ago. However, prices tend to fluctuate based on the mix of homes that are sold in a given month.