June 16, 2024

Consumers Feel Sanguine About the Economic Outlook, Expect Inflation to Moderate | Economy

Consumers still have favorable views of the economy, with expectations that inflation will continue to moderate from the peaks seen as the economy came out of the COVID-19 pandemic.

That is the view from the second estimate of consumer sentiment for February from the University of Michigan. Although the overall index dipped slightly to 76.9 from 79.6 in the advance estimate, “expected business conditions remained substantially higher than last autumn, with short-run expectations now 63% above and long-run expectations 46% above November 2023 readings,” the release on Friday said.

“Consumers perceived few changes in the state of the economy since the start of the new year, and they appear to be assured that inflation will continue on a favorable trajectory,” said survey director Joanne Hsu. “Sentiment is currently 8 points shy of the historical average since 1978.”

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Year-ahead inflation expectations edged up slightly to 3% annually from 2.9% a month ago.

The Michigan survey follows the Conference Board’s consumer confidence index for February, released on Tuesday, that showed an unexpected drop. The business organization blamed the decline on concerns about a slowing job market and worries over the U.S. political climate.

The Michigan survey did look at trends in partisanship and found that they rose significantly during the administration of former President Donald Trump, narrowed somewhat since President Joe Biden took office but remain “considerably larger” than differences measured by age, income and other demographic factors.

While the two surveys measure attitudes of consumers, the Michigan one tends to be more influenced by inflation and the Conference Board’s index more susceptible to changes in the labor market.

Both have shown in the past couple of years to have reflected the influence of political party affiliation, raising questions among economists as to how valuable they are as an indicator of consumer behavior. Throughout 2023, for example, the two consumer surveys showed Americans unhappy about the economy even as they continued spending and the economy outperformed forecasts.

Inflation has been rising of late, with a key indicator that the Federal Reserve uses to guide it in setting interest rates increasing in January, though in line with forecasts. Overall, inflation is trending closer to the Fed’s 2% annual target but it is not there yet. That means the central bank will likely not cut interest rates before the early summer.

“Persistent price pressures would delay the Fed’s easing of monetary policy,” BCA Research wrote on Friday. “However, investors have already revised their rate cut expectations, bringing them closer in line with the December Fed projections. While a second inflation wave is a risk to the outlook, our base case is that the disinflation trend will remain intact.”

Next week brings the monthly jobs report from the Labor Department for February, with expectations it will have moderated from the surprise 353,000 jobs created in January. That number may have been juiced by annual revisions and seasonal adjustments that are made at the start of the year.

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