Consumer sentiment rebounded in May to its highest level in the last nine months. There have been only four times out of the last 110 monthly surveys that the Sentiment Index was higher. The renewed strength was due to increased jobs and incomes as well as low inflation and interest rates. In addition, homeowners more frequently reported gains in home values than anytime during the past decade. Overall, the data indicate that real consumption will grow by 2.5% in 2016 and by 2.7% in 2017.

Personal Finances
Consumers voiced quite positive assessments of their personal finances. Recently improved finances were cited by 49% in May, the highest level since early 2005. When asked to explain how their finances had changed, more consumers cited income gains than any time since late 2000, and fewer consumers complained that price increases since 2003. In addition, the highest percent of consumers since 2006 expected their financial situation to improve during the year ahead. This optimism is based on modest job increases as well as modest expected income gains—1.6% in May, which was higher than the annual average expected gain in the prior seven years.

Buying Plans Improve
Improved access to credit was cited by consumers as justification for their improved buying plans. The most favorable credit conditions were cited for vehicles since 2004 and for household durables since 2005. The biggest change for the housing market was how current home owners viewed home selling conditions. The May survey recorded the most positive views of home selling conditions in a decade, with the recent gains due to owners expecting to sell their homes for higher prices, high enough to avoid losses.

The Consumer Sentiment Index was 94.7 in the May 2016 survey, up from 89.0 in April and 90.7 last May’s survey. The Current Conditions Index rose to 109.9 in May, reaching its highest level since the last cyclical peak in January 2007. The Expectations Index rose to 84.9, significantly higher than last month’s 77.6, but barely above last May’s 84.2, and remained well below the January 2015 high of 91.0.

The gains in consumer confidence are all the more remarkable since they followed dismal reports on GDP and inflation. The renewed confidence is likely to encourage a higher labor force participation, acting to raise aggregate incomes and limit further declines in the unemployment rate. A growing sense of uncertainty, however, has also been recorded. The most important of source of this uncertainty is not whether the Fed will raise interest rates in the next few months, but the shape of government economic policies under a new president. This will temper consumer spending by acting to maintain a higher level of precautionary savings.