In statistical terms, this can be seen by adding last month’s sentiment reading to the list of factors explaining this month’s. More importantly, confidence feeds on itself. While payroll job growth will slow, the unemployment rate should remain very low and, barring some shock, gasoline prices should stay low even as year-over-year CPI inflation drifts downwards. So what does this tell us about sentiment going forward?įirst, under our baseline forecast, the fundamentals should remain relatively positive. By November of last year, this gap had opened up to a record 28 index points. Since the start of 2021, consumer sentiment has, on average, been 18 index points lower than a simple equation would suggest based on economic fundamentals. However, it is important to recognize that the improvement in sentiment isn’t just about better fundamentals. Moreover, on Friday, the S&P500 closed at an all-time record high, now up 24% in the past year. However, year-over-year CPI inflation has fallen to 3.3% while a gallon of gas now costs just over $3. The employment picture remains solid, with the economy adding 2.7 million payroll jobs over the past year and the unemployment rate flat at 3.7%. Seen in this context, some of the recent improvement in sentiment is easy to explain. A stock market slump didn’t help, with the S&P500 falling 12% year-over-year. Seasonally adjusted CPI was up 8.9% year-over-year while regular unleaded gasoline hit an all-time high of over $5 a gallon. While job growth was strong and unemployment was low, inflation was having a very negative impact on attitudes. In June of 2022, the sentiment index hit an all-time low of 50.0.

In particular, sentiment is positively impacted by increasing employment and stock prices and negatively affected by rising unemployment, inflation and gasoline prices. But is this because the economy has seen further gains or just that people are beginning to appreciate the progress the economy has made so far? And if 2024 is a year of better confidence, what does that mean for the economy and the financial environment?Ī simple statistical equation can explain 58% of the variation in consumer sentiment since 1978, excluding a few months around the onset of the pandemic. Attitudes do finally seem to be improving. One of the great puzzles in the economic landscape, particularly over the past year, has been why Americans felt so negative about the economy when the raw numbers looked quite good and were getting better. The Conference Board’s consumer confidence index rose 9.1 points in December to its second highest reading in two years while even the perennially negative Gallup survey on “satisfaction with the way things are going in the U.S.”, showed some improvement in December. This confirmed other signs of a thaw in the public mood. The numbers were a pleasant surprise – the consumer sentiment index jumped 9.1 points to a reading of 78.8 – the best number seen since July 2021. Last Friday, as much of America was settling in for the coldest weekend of the year, the University of Michigan released its preliminary January reading on consumer sentiment. Subscribe to the Notes on the Week Ahead newsletter to receive it directly in your inbox.

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