Understandably, American sentiment plummeted during the coronavirus worldwide infestation. Consumer sentiment improved in 2021 as more information about the virus became available, along with the slow and inconsistent relaxing of government restrictions. Then, and almost humorously, it was not the breakout of a new viral infection, but the Federal Reserve rate hike campaign started in 2022, which caused consumer sentiment to drop to all-time lows since the University of Michigan started surveying households in 1940.
The sentiment index bottomed in July 2022, and since then, Americans have slowly been improving their views on the economy and their personal finances – two key questions asked during the survey. The holiday retail sales exceeded most analysts’ expectations as consumer spending reached record levels. It is not surprising that as consumers’ confidence in their personal finances improves, holiday spending will also improve over 2022. The University of Michigan Sentiment Index has been rising steadily since it bottomed out in July 2022 and, after declining during the summer of 2023, increased during the last quarter of 2023. The January index reading is now at two-year highs.
Nonetheless, the economy and consumer sentiment still have a long way to go in comparison to the rock n roll days of 1995 to 2000 or even 2015 to 2020. Americans are weighed down with many concerns that include wars in Ukraine and the Gaza Strip and pending wars in Taiwan and the Middle East. Stateside is concerned about inflation, the risk of rising unemployment, rising energy prices, and soon who will be our next President.
These are, without question, issues to pay attention to, but for now, households are in the best financial condition in decades. As it pertains to consumers, unemployment remains at 60-year lows with more jobs than eligible candidates, inflation is now at 3.3% due to effective Federal Reserve rate policies, and many households have sub-4 % fixed home mortgage rates.
What Does It Mean To Me?
Consumer spending represents 66% of the US Gross Domestic Product (GDP) of our economy. As consumer sentiment improves, so does spending and economic growth and vice versa. This is why we monitor data on consumers and households to determine the probability of continued economic growth or the beginning of a slowdown that may lead to a recession.
It is good news that holiday retail sales were strong and, even more important, that consumer sentiment continues to improve. However, feelings can change quickly. This is why we keep a close watch on economic reports to identify changes in consumer spending and to determine the future potential of the US economy and stock market.
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