Why Americans are feeling better about the economy

Recent data reveals why consumer sentiment is up - in 4 charts

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At the end of 2023, the average American was feeling seriously discouraged about the economy. Headlines touted articles like “Why Americans feel inflation, economy are much worse than they are” and “Should we believe Americans when they say the economy is bad?”

The numbers weren’t lining up with consumer sentiment or “vibes”. It was even being called a “Silent Depression”. Now, we’re finally feeling better about the economy. But why?

The Consumer Sentiment Index

Feeling upbeat? You're not alone. Recent data is painting a pretty rosy picture of the consumer mood.

A Morgan Stanley survey just tossed us a stat showing consumer sentiment is at a cozy five-month peak as of January. And get this: A hefty 76.5% of American adults are betting their financial situation will be just as good, if not better, a year from now.

That's the most optimism we've seen since September 2021, per the latest scoop from a New York Federal Reserve study.

US Consumer Price Index

In the past three years, inflation took a significant leap, surging nearly 18%, if we're to believe the consumer price index.

This index, which tracks the cost of goods and services that average Americans spend their money on, suggests we've all been feeling the pinch - but shows signs of easing up. As of January, the annual inflation rate has moderated to 3.1%, a considerable reduction from its peak at 9.1% in June 2022.

While it's still above the Federal Reserve's aim of 2%, this downward trend is a breath of fresh air, indicating we might be moving towards a more stable economic environment.

The S&P 500

2023 was a year the S&P 500 decided to flex, clocking in a hefty 25% gain and making the previous year's nearly 20% tumble look like a bad dream.

It may be the magic of the wealth effect.

This nifty bit of behavioral economics suggests folks open their wallets wider and strut a bit more confidently when their net worth buffs up, even if their paycheck hasn't seen a bump. With a solid 58% of Americans holding stocks by 2022, it's no wonder many are feeling a bit more jazzed about their financial futures with this S&P peak.

But it’s not all good news

Northwestern Mutual’s Christian Mitchell says Americans are still facing “financial shock fatigue” Recent events have created a feeling of financial uncertainty for some Americans that contradicts economic forecasting.

Plus inflation is up, from an annual pace of 3.1% to 3.2%. It may only be a small increase, but it’s enough to put people on edge.

What does this mean?

Well, for one, it suggests a recent Harvard study was right.

The reason Americans’ feelings about the economy differ so much from the numbers is to do with how we measure inflation.

Basically, our standard measure of inflation doesn't reflect how much more expensive it is to be in debt nowadays. When you take this into account, the 2023 sentiment gap closes by more than 70%.

And unfortunately, Americans are in a lot of debt.

On the other end of the spectrum, America’s CEOs are feeling increasingly optimistic about the economy.

Business Roundtable's CEO sentiment report jumped by 11 points this quarter. The report also suggests top execs are getting on board with a soft landing of the US economy, and that the chances of recession are decreasing.

The Takeaway

Fed Chair Jerome Powell said last week that new US inflation data is “along the lines” of what the Fed’s been looking for – though it needs to see “more good inflation readings” before it’s comfortable cutting rates.

The S&P 500 also just notched its best quarter in five years.

Are we undoubtedly in the clear? Maybe not. But the American public’s fears are finally easing, spending on luxury goods like travel and entertainment is soaring – things are definitely looking up.

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