Consumer sentiment rose in the December 2019 survey to near the top of the favorable range it has traveled during the past three years, according to the University of Michigan Surveys of Consumers.

Since the start of 2017, the Sentiment Index has averaged 97.0. This was the second best extended period of optimism recorded in the long history of the surveys, said U-M economist Richard Curtin, director of the surveys. The most favorable average level was during the four years from 1997 to 2000, when the index averaged 105.3.

Impeachments occurred in both periods without having a significant impact on economic expectations, he said. In the December 2019 survey, the impeachment hearing had a barely noticeable impact on economic expectations, as it was mentioned by just 2% of all consumers.

The data point toward a continued expansion in consumer expenditures, strong enough to counter lackluster business investment spending. There are still significant developments that could affect sentiment related to the Senate trial, the election and tariffs, Curtin said.

“The most important news from the December survey involved lower long-term inflation expectations and a shift toward the view that the unemployment rate was finally near its low point,” he said. “Lower long-term inflation affects not only consumer spending and saving decisions as well as judgements about wages, but will also influence policies aimed at avoiding or limiting the impact of the next recession.

“To be sure, no recession is expected by consumers in 2020. Nonetheless, while consumers recognized and applauded the recent decline in unemployment, they now anticipate that the national unemployment rate is more likely to start edging upward rather than downward in the year ahead.”
Record Low in Long-Term Inflation Expectations

Whereas near-term inflation expectations respond to changes in volatile prices (primarily oil prices in recent years), longer-term inflation expectations have more significant impact on the behavior of consumers, Curtin said.

In the December 2019 survey, consumers anticipated an annual inflation rate over the next five years or so to be just 2.2%, the lowest long-term inflation rate expected since this question was introduced in the late 1970s.

Continued Strength in Personal Finances
Assessments by consumers of their own financial situation remained quite favorable, with 56% of all households reporting improved finances, just below the half century peak of 57%. When asked to explain how their finances had improved, rising incomes and higher net household wealth were cited.

As might be anticipated, higher incomes were cited by middle-age workers and improved net wealth was more frequently cited by households with incomes in the top third of the distribution, Curtin said. Just 9% of all households expected their financial situation to worsen in 2020.
Consumer Sentiment Index

The Consumer Sentiment Index rose to 99.3 in December, posting its fourth monthly gain from the low of 89.8 in August. The Expectations Index rose slightly to 88.9 in December from last month’s 87.3 and last year’s 87.0. The Current Conditions Index rose to 115.5 in the December survey from last month’s 111.6, but remained just below last year’s 116.1.

The Sentiment Index remained largely unchanged in late December at the same very favorable level recorded at mid-month. Most of the December gain was among upper income households, with those in the top third of the income distribution gaining 7.5% from last month and those in the bottom two-thirds posting a gain of just 0.8%. The recent shift favoring higher income households is in the opposite direction when compared with all-time peaks in the late 1990's. The impeachment hearing had a barely noticeable impact on economic expectations, as it was mentioned by just 2% of all consumers in the December survey.

Inflation expectations declined in the December survey, with both the year-ahead and five-year expected inflation rates falling. For the year-ahead, an annual inflation rate of 2.3% was expected, the lowest since 2.2% was recorded twice, in December 2016 and September 2010 prior to the Great Recession's lows. Over the next five years, consumers expected an annual inflation rate of just 2.2% in December 2019, the lowest level since this question was first introduced in the late 1970s.

It is of some interest to compare the two best extended periods of optimism in the history of the surveys, both of which included an impeachment: the four years from 1997 to 2000, when the Sentiment Index averaged 105.3, and the three years from 2017 to 2019 when the Index averaged 97.0 (see the Chart). On average, the 2017-2019 Index was 92% of the earlier period. Surprisingly, for the bottom 10% in the income distribution, the Index was 96% of the earlier period, while the top 10% the Index was just 89% of the earlier period. There was little difference across income thirds: 93% for the lowest third to 91% for the highest.