Consumers are now more confident in the economy than they have been in the previous 12 years.
The Index of Consumer Sentiment increased 0.3% from December to 98.5 in January, according to the Survey of Consumers conducted by the University of Michigan. This marks an increase of 7.1% from January of last year.
“Consumers expressed a higher level of confidence January than any other time in the last dozen years,” Surveys of Consumers Chief Economist Richard Curtin said. “The post-election surge in confidence was driven by a more optimistic outlook for the economy and job growth during the year ahead as well as more favorable economic prospects over the next five years.”
This is a turnaround from the decrease at the start of the month, when the index slipped down to 98.1.
The Current Economic Conditions slipped 0.5% from December, but was still up 4.6% from last year.
“Consumers also reported much more positive assessments of their current financial situation due to gains in both incomes and household wealth, and anticipated the most positive outlook for their personal finances in more than a decade,” Curtin said.
“Consumers have become more convinced that the stronger economy would finally prompt the Fed to increase interest rates at a quicker pace, which caused one-in-five consumers to favor borrowing-in-advance of anticipated increases in mortgage rates, the highest level in more than twenty years,” he said.
The Index of Consumer Expectations also increased by 0.9% from last month’s 89.5 and up 9.2% from 82.7 last year to 90.3 in January.
An article by Jill Mislinski for Advisor Perspectives explains what this means historically:
The Michigan average since its inception is 85.4. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3.
“Overall, the post-election surge in consumer confidence was based on political promises, and not, as yet, on economic outcomes,” Curtin said. “Moreover, over the past half century the surveys have never recorded as dominant an impact of partisanship on economic expectations.”
However, Curtin explains that this division will soon level out.
“When the same consumers were re-interviewed from six months ago, the survey recorded extreme swings based on political party affiliation, with Democrats becoming much more pessimistic and Republicans much more optimistic,” he said. “Such divergences will ultimately converge since consumers hold economic expectations to be useful decision guides, which will require both sides to temper their extreme views.”