Americans' sentiment about the state of the US economy continues to improve.
The University of Michigan's latest consumer survey, released Friday, showed a 13% increase in overall sentiment in January. The index reading for the month was 78.8, the highest since July 2021, well above economists' expectations of 70.1.
The sentiment index's cumulative 29% increase over the past two months is the largest two-month increase since the U.S. economy recovered from the 1991 recession.
“The sharp increase in December was no coincidence,” poll director Joanne Hsu said in a statement. “Consumer views were supported by confidence that inflation has turned the corner and strengthening income expectations.”
The surge in sentiment comes as the Nasdaq 100 hit a new all-time high on Thursday and all three major stock averages are near record levels. The stock rally was fueled by a shift from investor fears of further interest rate hikes to debate over when the Federal Reserve's first rate cut will come.
A so-called soft landing – in which inflation reaches the Fed's 2 percent target without causing a sharp economic downturn – has moved close to a consensus call for the start of 2024 as economists have become increasingly confident that inflation will trend downwards. This represents a significant reversal from economic sentiment at the start of 2023, when a recession was widely expected.
Consumers are also recognizing this trend. Inflation expectations for the coming year reached 2.9% in Friday's report, the lowest level since December 2020. Longer-term inflation expectations fell to 2.8% from 2.9% in the previous month.
“Although the poor relationship with consumption growth means that the renewed confidence does not necessarily say much about the economic outlook, with confidence rising again and inflation expectations falling, it is another sign that the economy is on track for a soft landing is,” Capital Andrew Hunter, U.S. deputy chief economist for economics, wrote in a note to clients on Friday.
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The shift in sentiment also signals a reversal of what many have called a “mood recession” from the pandemic era, in which Americans' sentiment about the economy was out of sync with the strong data seen throughout most of 2023 .
“Consumer continued pessimism despite strong GDP and job growth has been one of the most confusing components of the post-pandemic economy, but that divergence is now narrowing,” national financial markets economist Oren Klachkin wrote in a note to clients.
Fans celebrate with the US national flag at the 2012 London Olympics. AFP PHOTO / YURI CORTEZ (Photo credit should read: YURI CORTEZ/AFP/GettyImages) (YURI CORTEZ via Getty Images)
The latest data on the state of the US economy also paint a convincing picture.
A review of retail sales in December showed consumers ended 2023 better than many economists had feared. Building permits also rose more than expected in December. And while headlines about layoffs across various sectors have increased in recent weeks, the hard data measure of jobless claims recently hit its lowest weekly level since September 2022.
The data assumes increasing economic growth in the fourth quarter. And some economists believe growth will continue through 2024.
Goldman Sachs chief economist Jan Hatzius told Yahoo Finance Live he expects the U.S. economy to grow 2.3% on an annual basis in 2024, about 1 percentage point above what he believes is the consensus forecast .
More importantly, Hatzius does not believe continued upward surprises in the economy will impact the Fed's rate-cutting plans.
“The driver for rate cuts in our forecast, and I would say what Chairman Powell said in the December press conference, is inflation coming back to target,” Hatzius said. “If inflation falls back to target, there will most likely be interest rate cuts because the federal funds rate of 5.37% will just seem very, very high compared to an economy producing a 2% inflation rate. “
Josh Schafer is a reporter for Yahoo Finance.
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