The preliminary December results from the University of Michigan Surveys of Consumers show overall consumer sentiment improved for the month but remains near historically low levels (see first chart). The composite consumer sentiment index increased to 59.1 in December, up from 56.8 in November. The index hit a record low of 50.0 in June and is down from 101.0 in February 2020 at the onset of the lockdown recession. The increase in December totaled 2.3 points or 4.0 percent. The level of the composite index remains consistent with prior recessions.
The current-economic-conditions index rose to 60.2 versus 58.8 in November (see first chart). That is a 1.4-point or 2.4 percent increase for the month. This component is just 6.4 points above the June low of 53.8 and remains consistent with prior recessions.
The second component — consumer expectations, one of the AIER leading indicators — gained 2.8 points, or 5.0 percent for the month, to 58.4. This component index is 11.1 points above the July 2022 low of 47.3 but 33.7 points or 36.6 percent below the February 2020 level. This index also remains consistent with prior recession levels (see first chart).
According to the report, “Consumer sentiment rose 4% above November, recovering most of the losses from November but remaining low from a historical perspective.” The report adds, “All components of the index lifted, with one-year business conditions surging 14% and long-term business conditions increasing a more modest 6%.” The report further notes, “Gains in the sentiment index were seen across multiple demographic groups, with particularly large increases for higher-income families and those with larger stock holdings, supported by recent rises in financial markets. Sentiment for Democrats and Independents rose 12% and 7%, respectively, while for Republicans it fell 6%.”
The one-year inflation expectations fell gain in December, declining for the sixth time in eight months to 4.6 percent. The result is significantly below the back-to-back readings of 5.4 percent in March and April but well above the pre-pandemic range (see second chart).
The five-year inflation expectations was unchanged, coming in at 3.0 percent in December. That result is well within the 25-year range of 2.2 percent to 3.5 percent (see second chart). The report states, “Year-ahead inflation expectations improved considerably but remained relatively high, falling from 4.9% to 4.6% in December, the lowest reading in 15 months but still well above 2 years ago.” Furthermore, “Declines in short-run inflation expectations were visible across the distribution of age, income, education, as well as political party identification. At 3.0%, long run inflation expectations has stayed within the narrow (albeit elevated) 2.9-3.1% range for 16 of the last 17 months.”
Pessimistic consumer attitudes reflect a significant list of concerns, including inflation, rising interest rates, and falling asset prices. Overall, economic risks remain elevated due to the impact of inflation, an aggressive Fed tightening cycle, and the continued fallout from the Russian invasion of Ukraine. The economic outlook remains highly uncertain. Caution is warranted.