Economists may be planning for the next recession, but consumers entered 2023 significantly more upbeat than they ended 2022, according to a monthly survey from the University of Michigan released Friday.
The university’s index of consumer sentiment rose 8.2% to 64.6 and is now just 4% below levels of a year ago. But consumers’ assessment of current economic conditions surged 15.5%, while future expectations rose by 3.5%.
Inflation that has begun to cool from the levels of last summer and wages that are closer in line with price increases have buoyed the moods of consumers.
“Consumer sentiment remained low from a historical perspective but continued lifting for the second consecutive month, rising 8% above December and reaching about 4% below a year ago,” said Joanne Hsu, survey director. “Current assessments of personal finances surged 16% to its highest reading in eight months on the basis of higher incomes and easing inflation.”
Attitudes on inflation improved for the fourth month in a row, falling to an annual level of 4% a year from now, compared to 4.4%.
“The current reading is the lowest since April 2021 but remains well above the 2.3-3.0% range seen in the two years prior to the pandemic,” Hsu said..
Economists expect that 2022 finished stronger than expected, with fourth quarter gross domestic product rising at an annual rate of 3%. Yet many still see a mild recession coming later this year.
“Slower inflation over the past few months, led by falling energy prices and normalizing prices for pandemic-hit sectors such as autos and airfares, has likely played a role in sustaining the momentum of the economy,” Wells Fargo wrote in its monthly economic outlook for January on Friday.
On Thursday, the government said consumer prices fell 0.1% in December and the annual rate slowed to 6.5% from 7.1% a month earlier. That has raised hopes the Federal Reserve can temper its aggressive campaign of raising interest rates when it meets next month.
“We look for a 25 bps rate hike at the February 1 FOMC meeting, but we still expect the target rate to peak at 5.00%-5.25% and remain there for the rest of 2023,” Wells Fargo added. “We also expect a recession to begin in the United States in the second half of the year, albeit a slightly more mild one than in our previous forecast.”
As spending by consumers accounts for two-thirds of the economy’s output, it is the critical factor in whether the economy escapes a recession or gets by with a mild one. Falling inflation helps as it allows workers who are enjoying wage increases to stay even or ahead of rising prices. So far, the sharpest declines in inflation have come in energy prices and costs of durable goods. Inflation in the services sector, along with housing prices and rents, is still running hotter than the Fed would like.
“The Fed is not going to declare victory over inflation until they are certain that it has been permanently contained,” Johan Grahn, vice president and head of ETF strategy at Allianz Investment Management, said on Thursday. “That level of certainty might have increased marginally with today’s print, but the last thing the Fed will hang their pivot-hat on is inflation relief that might turn out to be “transitory.”
Source: US News