Rising incomes and falling inflation sparked a 13% increase in consumer sentiment in January, coming on the back of a similar surge in December, the University of Michigan said on Friday.
The back-to-back hikes in the university’s index show “that the sharp increase in December was no fluke,” survey director Joanne Hsu said.
“Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations,” Hsu added. “Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended.”
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The overall index rose 13.1% to 78.8 from 69.7 a month ago. The index assessing perceptions of current economic conditions increased 13.6% to 83.3 from 73.3, while the future expectations measure was up by 12.6% to 75.9 from 67.4 in December.
“Like December, there was a broad consensus of improved sentiment across age, income, education, and geography,” Hsu said. “Democrats and Republicans alike showed their most favorable readings since summer of 2021. Sentiment has now risen nearly 60% above the all-time low measured in June of 2022 and is likely to provide some positive momentum for the economy.”
Importantly, inflation expectations for a year ahead as measured by the University of Michigan slipped to 2.9% – the lowest reading since late 2020 and a sign that consumers believe the Federal Reserve is winning its war against inflation.
In another economic report, sales of existing homes fell by 1% in December and are now down to the lowest annual level in nearly 30 years, according to the National Association of Realtors. However, median prices rose 4.4% from a year ago to $382,600.
The housing market is caught between high prices and a diminished inventory of homes for sale as current owners are holding onto homes financed at mortgage rates of 3% and below. Rates have ticked down lately, but are still in the high 6% range.
There may, however, be some relief in 2024 as mortgage rates fall in line with reduced interest rates from the Federal Reserve.
“Mortgage rates will continue to remain a wild card for home shoppers,” said Danielle Hale, chief economist at Realtor.com. “Although mortgage rates dropped further this week, stronger readings on inflation, which came in higher than expected in December, surprisingly strong retail sales data, and lower than expected jobless claims figures have already pushed up 10-year yields and could cause a similar reaction in mortgage rates.”
Earlier this week, the National Association of Home Builders housing market index rose in January to 44 from 37 previously, beating expectations and suggesting an uptick in optimism.
“The latest month’s sales look to be the bottom before inevitably turning higher in the new year,” said NAR Chief Economist Lawrence Yun. “Mortgage rates are meaningfully lower compared to just two months ago, and more inventory is expected to appear on the market in upcoming months.”
Overall views on the economy have perked up lately in line with reports of declining inflation, a stronger job market and reduced odds of a recession in 2024. The latest survey from the Federal Reserve Bank of New York found fewer respondents who reported being worse off than a year ago. A smaller share of consumers also said they expected to be worse off – and a larger share expected to be better off – a year from now.
The Blue Chip Economic Indicators survey released last week echoed the theme of more positive times.
Some 74% of respondents now think the economy is headed for a soft landing, defined as a return of inflation close to the Fed’s 2% target without the economy entering a recession, with the odds of a recession down to 42% from 65% a year ago.
In another piece of good news that removes some uncertainty, Congress on Thursday passed a stop-gap measure to keep the government functioning until early March. Stocks were higher early Monday following a rally in tech shares Thursday.