At least as of early December, American consumer confidence is booming. The Consumer Sentiment Index jumped up to 53.3, up from 51 in November. This surge is indicative of a brighter future as households are increasingly more hopeful about the state of today’s conditions and tomorrow’s economy. The index typically indicates percent changes on a monthly (MoM) and annual (YoY) basis. While this is a useful top-level approach, it’s highly reductive and does not offer the insights needed to tap into changing consumer attitudes.
While overall sentiment continues to get rosier, the Current Conditions index just took a minor plunge. The last thing we need is another slip. It fell from 51.1 to 50.7. Yet the Consumer Expectations index made particularly pronounced progress, jumping to 55 from 51. On that basis, consumers should be less optimistic about their present circumstances. Over the course of 2023, they have shifted significantly toward optimism when it comes to future economic prospects.
Economic Outlook and Consumer Confidence
The latest data suggests that consumers across the country are feeling more optimistic and more positive about the economic outlook. Consumers have lowered their one-year expectations down to 4.1%, down from 4.5%. This change reflects a more guarded, but still positive outlook on short-term economic prospects. That was not the case in the five-year forecast, which dropped by a similar amount, down to 3.2% from 3.4%. These changes are a reflection of consumers being a bit more optimistic but more cautious as they face the current contentions of the economy.
This increase in the Consumer Sentiment Index is an important marker, especially considering the larger economic picture. It highlights how American households are adjusting their expectations in response to ongoing market dynamics. Although the environment today may not feel quite as sanguine, consumers definitely seem to be ready to turn their gaze to the future with optimism.
Currency Implications and Inflation Concerns
The uptick in consumer sentiment comes as the US Dollar continues to take a defensive position. US Dollar Index, which tracks the greenback against a basket of six major currencies, is now trading just around the sub-99.00 area, multi-week lows. Currency collapse The performance of the naira introduces important lessons about inflation and the effect it has on consumer behavior.
Core inflation, a key central bank dogma, has an important influence on the conduct of monetary policy. Central banks like the U.S. Federal Reserve traditionally set an inflation target of 2%. When the Core Consumer Price Index (CPI) is above this threshold, monetary authorities usually respond by increasing interest rates. They do this to bring down inflation in a meaningful way. On the flip side, every time Core CPI drops below 2%, the Fed cuts interest rates, reviving economic activity.
Consumers are understandably turned around from worrisome economic indicators. Depending on how inflation targets develop and their expectations for central bank actions, their level of confidence is likely to change. In this context, core inflation is inarguably important, as high costs for essentials like food and housing will continue to sap consumer purchasing power and overall economic optimism.