Consumer sentiment has remained at very favorable levels for more than a year. In the February survey, it was just below the October 2017 peak of 100.7, the highest level since 2004, according to the University of Michigan Surveys of Consumers.

Expected gains in incomes, jobs and after-tax pay dominated concerns about rising interest rates and volatile stock prices, said U-M economist Richard Curtin, director of the surveys.

Consumers anticipated that the unemployment rate would dip below 4 percent in 2018, he said. Only modest gains in wages were anticipated, and inflation expectations have remained unchanged during the past few months. Overall, the data signal an expected gain of 2.9 percent in real personal consumption expenditures during 2018.

"Modest hikes in interest rates will not cause postponement of discretionary purchases as long as wages and take-home pay continue to rise," Curtin said. "Personal tax cuts are crucial to spur additional spending, but unlike prior cuts that had an immediate positive impact, this tax cut has not generated universal support.

"Partisanship has greatly influenced perceptions of the tax cut legislation. When asked to identify recent economic changes, net positive references to the tax cuts were made by 37 percent of Republicans and by 22 percent of Independents, but among Democrats, net negative references were made by 4 percent. The partisan division is likely to last even after the cuts add to take-home pay and boost spending."

Tax reforms and job gains dominate
More consumers reported that they had recently heard favorable news about recent economic developments in February than at any other time since 1984. Two-thirds of consumers reported changes in either tax policies or employment gains.

In the past two months, more consumers spontaneously mentioned favorable change in economic policies than has been recorded in more than a half century, Curtin said. Favorable assessments of the current job situation were joined by optimistic expectations for additional declines in unemployment during the year ahead. Few complained about interest rates, although they were expected to increase by the most consumers since 2006.

Gains in jobs, wages and after-tax pay
When asked to assess their financial situation, 54 percent of all consumers reported improved finances, the highest proportion since January 2000. Income gains of 2.2 percent were anticipated across all households, just below the 2017 peak of 2.3 percent—the highest since 2008. Among those under age 45, a median income increase of 4.2 percent was expected during the year ahead, which was also down from the 2017 peak of 4.8 percent.

Consumers do not anticipate a surge in the inflation rate anytime soon, Curtin said. When asked to explain their financial situation in the February survey, the fewest consumers in decades cited rising prices as a cause for declining living standards.

Consumer Sentiment Index
The Consumer Sentiment Index was 99.7 in the February 2018 survey, up from 95.7 in January and 96.3 in February 2017. The Current Conditions Index was 114.9 in February, up from 110.5 in January and 111.5 last February. The Expectations Index was 90.0 in February, up from 86.3 in January and last year's 86.5.

Consumer sentiment remained quite favorable in February, at its second highest level since 2004. Consumers based their optimism on favorable assessments of jobs, wages, and higher after-tax pay. The highest proportion of households since 1998 reported that their finances had improved compared with a year ago and anticipated continued gains during the year ahead. Economic news heard by consumers continued to be dominated by the tax reform legislation and net job gains, which was untarnished by the consensus view that interest rates would increase and stock prices would remain volatile. Although rising interest rates was seen as a reason to temper their longer term outlook for the overall economy, only a modest moderation in the pace of economic growth was anticipated. Although consumers expected the unemployment rate to dip below 4% in 2018, only modest wage growth was anticipated, and inflation expectations have remained unchanged. Interest rates, even when pushed higher in the weeks and months ahead, will not cause postponement of discretionary purchases as long as income continues to rise near its present pace. Personal tax cuts are crucial to spur additional spending, but unlike prior cuts that had an immediate positive impact, this tax cut has not generated universal support across partisan lines. Overall, the data signal an expected gain of 2.9% in real personal consumption expenditures during 2018.