Consumer confidence was on the rise in December, rising to the highest level seen since April, and backtracking on the two consecutive months of declines seen in October and November, as Americans began to feel a little more optimistic regarding the economy and the job market.
In December the Conference Board’s consumer confidence index landed at 108.3, a rise above the 101.4 from November. Consumer attitudes toward the prospect for income and business conditions also rose.
According to the Conference Board, in December inflation expectations fell to the lowest level since September, as gas prices continued to decline. After hitting a record high in June, gas has fallen nearly 40% to $3.11 on Wednesday, according to data from AAA.
Lynn Franco, senior director of economic indicators at The Conference Board said, “Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”
Even as prices remain elevated for a variety of products and services, from haircuts to groceries, inflation expectations were declining. However the Federal Reserve is still watching longer-term inflation expectations closely, as it seeks to prevent inflation from becoming entrenched.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients, that it was important to understand that consumer expectations are still roughly 20 points below pre-pandemic levels, and that confidence and spending do not necessarily track together consistently, having clearly been decoupled since 2016.
Shepherdson wrote, “Though for the record the current level of the expectations index is consistent — based on the long-term relationship — with real consumption rising by about 2%. That’s in line with our 2023 forecast.”
In its report the Conference Board noted that the current level of expectation sits at roughly 80, which is a level still associated with recession.
Last week in comments Federal Reserve Chair Jerome Powell said that it is still possible the central bank will pull off a soft landing, where the economy slows without entering a recession. However he noted that the longer interest rates need to be kept elevated to gain control of inflation, the less likely that scenario will be.
Earlier this month, Powell said at a press conference, “To the extent we need to keep rates higher and keep them there for longer and inflation moves up higher and higher, I think that narrows the runway. But lower inflation readings, if they persist in time, could certainly make it more possible.”
Although Powell stopped short of forecasting a recession, he did note that in order to reduce current rates of inflation, there would need to be an extended period of below-trend growth and a cooling of the job market.
