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June 25, 2024

Consumers Regain Economic Confidence As Inflation Cools and Job Market Strengthens

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Jan 30, 2024

Consumer confidence climbed to its highest level in over two years in January 2023, according to new data from The Conference Board. The strong rebound in confidence was driven by cooling inflation and continued job growth, restoring faith in the economic recovery.

Confidence Reaches Pre-Pandemic Levels

The Conference Board’s index of consumer confidence jumped to 114.8 in January, up from 109.0 in December 2022. This marks the highest level for the index since December 2021 and brings confidence back to pre-pandemic levels.

“The increase in confidence is likely tied to the recent moderation in inflation, which has eased financial strains on households and boosted hopes for the economy,” said Anna Wong, Senior Economist at Bloomberg Economics.

The jump in confidence comes after months of declining sentiment amid high inflation and rising interest rates. But with price increases slowing in recent months and the job market remaining resilient, consumers are beginning to feel more optimistic about their finances and the broader economy.

Inflation Concerns Cool Alongside Price Rises

A key factor driving the confidence rebound is the steady easing of inflationary pressures. The annual inflation rate fell to 6.5% in December, down from a peak of 9.1% in June 2022. While still elevated, the downward trend in inflation has brought some relief after an intensely inflationary 2022.

“Inflation is still top of mind but recession concerns are receding as price increases slow,” said Curt Long, Chief Economist at the National Association of Federally-Insured Credit Unions. “Consumers have more faith prices will stabilize allowing savings and purchasing power to rebound.”

The Conference Board survey showed consumers’ inflation expectations for the next 12 months dropped to 4.6% in January, the lowest level since April 2022. This aligning of expectations with reality has enabled households to regain a sense of financial security.

Unemployment Holds Near 50-Year Low

While inflation is moderating, the job market remains exceptionally strong. The unemployment rate ticked up to 3.5% in December but is still near five-decade lows. Robust hiring combined with slowing layoffs has consumers feeling better about their income and job prospects.

“The labor market continues to defy gravity despite signs of slowing in parts of the economy,” said Julia Coronado, President of MacroPolicy Perspectives LLC. “With plentiful opportunities and rapid wage growth, most households are in good financial shape regardless of stock or home prices.”

The Conference Board survey showed the share of respondents saying jobs are “plentiful” rose to 59.3% in January, up from 57.4% in December 2022. And those claiming jobs are “hard to get” dropped to 10.3% from 10.8%.

Category Jan 2023 Dec 2022
Jobs Plentiful 59.3% 57.4%
Jobs Hard to Get 10.3% 10.8%

This divergence between a strong job market and slowing price increases explains much of the rebound in optimism. Consumers feel they have the income and job security to spend, while getting relief from runaway inflation.

Spending and Investing Poised to Accelerate

With consumers opening their wallets again after months of inflation-induced caution, both consumer spending and equity markets could see a boost.

“We see scope for solid gains in consumer spending as households tap into excess savings now that prices are stabilizing,” said Nancy Davis, Founder of asset management firm Quadratic Capital. “And renewed optimism may prompt rotation back into stocks after a dismal 2022.”

There are already signs that pent-up demand from cautious consumers is filtering into the economy. Retail sales rebounded strongly in January after declines in November and December, indicating shoppers are returning to stores.

And the rally in stock markets this year aligns with recovering sentiment. The Dow Jones Industrial Average is already up over 5% year-to-date, reversing much of 2022’s losses.

“Our econometric models show that consumer confidence has a measurable impact on household spending and equity market performance,” said Mark Zandi, Chief Economist at Moody’s Analytics. “So this rebound indicates the consumer slowdown will be limited, supporting continued economic growth.”

Fed Rate Hikes Still a Risk to Sentiment

While optimism improved across income levels, confidence remains somewhat depressed among low-income consumers. Lingering inflation continues to strain those with fewer financial resources.

And with further interest rate hikes anticipated from the Federal Reserve, borrowing costs could rise further. This may dampen confidence again if rate hikes begin depressing home sales or sparking layoffs.

“The Fed remains resolute on restoring price stability, so additional rate increases are in store,” said Sarah House, Senior Economist at Wells Fargo. “If inflation proves sticky or the Fed has to raise rates higher than expected, confidence may waver as financial conditions tighten.”

Most economists expect a 25 basis point rate hike at next week’s Fed meeting. But given strong labor market data, some worry that continued aggressive hikes could be on the table. This policy uncertainty presents some downside risk even amid January’s confidence surge.

Cautious Optimism for 2023

While risks remain, January’s sharp rebound in sentiment provides hope that the worst inflation pressure has passed. Consumers have shown remarkable resilience through an intensely challenging 2022.

“Households reacted to surging prices by drawing down savings and taking second jobs,” said Tim Quinlan, Senior Economist at Wells Fargo. “Now their hard work is paying off with moderating inflation lifting optimism about 2023.”

Further declines in inflation alongside steady job gains would cement the foundation for sustained confidence and spending increases. For now, consumers are cautiously optimistic these trends can continue.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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