US consumer sentiment races to 2-1/2-year high; inflation expectations
ease
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[January 20, 2024] By
Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer sentiment improved in January,
hitting the highest level in 2-1/2 years amid growing optimism over the
outlook for inflation and household incomes, which bodes well for the
economy's prospects this year.
The better-than-expected reading in sentiment reported by the University
of Michigan on Friday reflected a brightening of moods across all age
and income groups, education and geographical locations as well as
political affiliation.
It suggested that Americans were finally warming up to the economy's
resilience after much anxiety over high inflation, which has weighed on
President Joe Biden's popularity. Consumers' inflation expectations over
the next 12 months were the lowest in three years, good news for the
Federal Reserve.
"The economy is not going backwards, it is going forwards at the start
of 2024," said Christopher Rupkey, chief economist atFWDBONDS in New
York. "For the first time, massive interest rate hikes have not put a
damper on economic growth."
The University of Michigan's preliminary reading on the overall index of
consumer sentiment came in at 78.8 this month, the highest reading since
July 2021, compared to 69.7 in December. Economists polled by Reuters
had forecast a preliminary reading of 70.0.
It was the second straight monthly increase and occurred against the
backdrop of a stock market rally, a fairly healthy labor market and
gasoline prices that have held at lower levels.
The index has now rebounded nearly 60% after plumbing record lows in
June 2022. It is now just 7% shy of the historical average since 1978.
Joanne Hsu, the director of the University Of Michigan's Surveys of
Consumers, noted that "Democrats and Republicans alike showed their most
favorable readings since summer of 2021."
The survey's reading of one-year inflation expectations fell to 2.9%
this month, the lowest level since December 2020. That was down from
3.1% in December and put these inflation expectations within the
2.3%-3.0% range observed in the two years prior to the COVID-19
pandemic.
The survey's five-year inflation outlook slipped to 2.8% from 2.9% in
the prior month. They are now in the 2.9%-3.1% range seen for 26 of the
last 30 months, but slightly higher relative to the 2.2%-2.6% band that
prevailed in the two years before the pandemic.
Easing inflation expectations support economists' views that the U.S.
central bank will start cutting interest rates in the first half of this
year. Since March 2022, the Fed has hiked its policy rate by 525 basis
points to the current 5.25%-5.50% range.
Though there is no strong correlation between sentiment and consumer
spending, the main engine of the economy, the surge could help to allay
fears of a recession. Americans have maintained spending despite higher
prices and borrowing costs as labor market tightness keeps wage growth
elevated.
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People shop at the Shops at the Oculus and Westfield Shops during
Black Friday shopping in New York City, U.S., November 24, 2023.
REUTERS/Brendan McDermid/File Photo
"Confidence alone is not a good indicator of where consumer spending
is heading, but improved sentiment does reduce the risk that
consumers increase their saving drastically this year, which is a
key risk to our more upbeat outlook on consumer spending and GDP
growth," said Grace Zwemmer, an economic research analyst at Oxford
Economics.
Stocks on Wall Street were trading higher. The dollar slipped
against a basket of currencies. U.S. Treasury prices fell.
HOME SALES FALL
A separate report on Friday from the National Association of
Realtors showed existing home sales fell in December to the lowest
level in nearly 13-1/2 years. Home resales could, however, be close
to turning the corner as mortgage rates decline and housing
inventory shows signs of improving.
Existing home sales slipped 1.0% last month to a seasonally adjusted
annual rate of 3.78 million units, the lowest level since August
2010. Home resales are counted at the closing of a contract. The
sales in December likely reflected contracts signed in the prior two
months, when the average rate on the popular 30-year fixed-rate
mortgage was stuck above 7.0%.
The 30-year fixed-rate mortgage rate averaged 6.60% this week, an
eight-month low, compared to 6.66% in the prior week, according to
data from mortgage finance agency Freddie Mac.
Home resales, which account for a large portion of U.S. housing
sales, dropped 18.7% to 4.09 million units in 2023, the lowest level
since 1995. There were 1.0 million previously owned homes on the
market in December, up 4.2% from a year ago, but still below the
nearly 2 million units before the pandemic.
At December's sales pace, it would take 3.2 months to exhaust the
current inventory of existing homes, up from 2.9 months a year ago.
A four-to-seven-month supply is viewed as a healthy balance between
supply and demand.
With supply still tight, the median existing home price increased
4.4% from a year earlier to $382,600 in December.
The pace of increase in house price inflation, however, slowed in
the fourth quarter. The median house price on an annual basis rose
0.9% to a record high of $389,800 in 2023.
"With mortgage rates now much lower, somewhat greater supply could
support the level of sales into the first quarter as demand picks
up," said Veronica Clark, an economist at Citigroup. "We would also
expect stronger demand to put further upward pressure on home prices
after some slowing in the fourth quarter."
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul
Simao)
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