Consumer sentiment soared 13% in January to reach its highest level since July 2021—continuing the sharp increase seen in December—primarily on the basis of an improving outlook over inflation and personal incomes, according to the University of Michigan Surveys of Consumers.

Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as the First Gulf War and a recession ended. Sentiment has now risen nearly 60% above the all-time low measured in June 2022 and is now 7% shy of the historical average reading since 1978.

“For much of 2023, consumers had reserved judgment about the inflation slowdown and whether it would persist,” said U-M economist Joanne Hsu, director of the Surveys of Consumers. “Over the last two months, consumers have finally felt assured that their worst fears for the economy would not come to pass.

“This is not to say, however, that consumers as a whole are feeling sanguine about the economy; nearly half still expect challenging times for the economy in the year ahead. Uncertainty stemming from the conflict in the Middle East and the looming election may also factor into consumer views in the months ahead.”

Consensus improvement in views of the economy

For the second consecutive month, there was a broad consensus of higher sentiment across age, income, education and geography. Furthermore, consumers saw favorable developments throughout the economy as well, Hsu said.

Less than one-third of consumers expect unemployment rates to rise in the year ahead, compared with 41% a year ago. Stock market expectations are at their strongest in over two years.

Consumers also exhibited more confidence in their own personal prospects, with a rising share of consumers expecting improvements in their own financial situations in the next year. Over half of consumers expect their incomes to grow at least as fast as inflation, the highest share since July 2021.

Consumers remain split about trajectory of economy

While consumers are broadly in agreement that the economy has improved substantially since the all-time low in sentiment reached in mid-2022, consumers are currently split about precisely how strong economic prospects are this month, according to Hsu.

About 41% of consumers expect good times in the year ahead for business conditions, while 48% expect bad times. In contrast, in June 2022, 79% of consumers expected challenging times ahead for the economy.

With considerable uncertainty on the horizon from continued conflict in the Middle East and the looming election, these differences in perceptions may persist, Hsu said.
Consumer Sentiment Index

The Consumer Sentiment Index rose to 79.0 in the January 2024 survey, up from 69.7 in December and above last January’s 64.9. The Current Index rose to 81.9, up from 73.3 in December and above last January’s 68.5. The Expectations Index rose to 77.1, up from 67.4 in December and above last January’s 62.6.

Consumer sentiment confirmed its early-month reading, surging 13% to reach its highest level since July 2021, reflecting improvements in the outlook for both inflation and personal incomes. January's gain has been exceeded only five times since 1978, one of which was last month at an even larger increase of 14%. Consumers expressed gains in their views on their personal finances as well as the macroeconomy; the short-run business outlook soared 27%. After reserving judgment last fall about whether the slowdown in inflation would persist, consumers now feel assured that inflation will continue to soften. Sentiment has resumed the upward trajectory from the all-time low measured in June of 2022, which had stalled in the late summer and fall of 2023. However, consumers expressed considerable disagreement about the future of the economy. About 41% of consumers expect good times in the year ahead for business conditions, while 48% expect bad times. This still represents a vast improvement over the past year and a half; in June of 2022, a whopping 79% of consumers expected challenging times ahead for the economy. Sentiment is now 7% below the historical average since 1978.

Year-ahead inflation expectations eased to 2.9%, down from 3.1% in December and 4.5% in November. The current reading is the lowest since December 2020 and is now within the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations were unchanged from last month at 2.9%, staying within the narrow the 2.9-3.1% range seen for 27 of the last 30 months and remaining slightly elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.