Consumer sentiment rose in March to the highest level in more than two years and expectations for inflation fell, a good sign for the economy and for President Joe Biden.
The University of Michigan Consumer Sentiment Index soared to 79.4 in March, up from a preliminary reading of 76.5. That is a 28.1% change from this time last year. Sentiment is now at the highest level since July 2021, before the United States began grappling with its explosive bout of inflation.
Year-ahead consumer sentiment expectations also improved. The index for consumer expectations rose to 77.4 in March from 75.2 in February. Short-run inflation expectations have fallen within the 2.3-3.0% range last seen in 2018 and 2019.
The latest reading should come as a relief to Biden, who has been struggling to convince voters that his stewardship of the economy merits a second term.
While objective metrics of economic strength — like the labor market, the unemployment rate, and gross domestic product — have been healthy, inflation and perceptions of the economy have caused voters to sour on Biden.
If consumer sentiment continues to keep coming in stronger, it could translate to higher approval ratings and a better chance that Biden is reelected. Nevertheless, his approval ratings are underwater. A recent CNBC survey found that Biden’s economic approval numbers are only at 37%, which is up from 33% in December.
“Critically, consumers exhibited confidence that inflation will continue to soften,” said survey director Joanne Hsu. “Assessments and expectations of personal finances improved modestly from last month, as the perceived negative effects of high prices and expenses on living standards eased.”
Hsu said that, while sentiment once again ticked up, notably it has been quite stable through the first quarter of this year.
“This stability reflects a perception among consumers that the economy has been holding steady in its current state,” she said. “As the election season progresses and debates over economic policy become more salient for consumers, their outlook for the economy could become more volatile in the months ahead.”
The reading shows that perhaps the relief from the declines in inflation is beginning to filter through to consumers, who for nearly two years have been wracked by too-high inflation.
The Federal Reserve has been raising interest rates since March 2022 in order to drive down inflation. Inflation peaked at about 9% in June 2022 and has since fallen to a much more reasonable 3.2% (although it is still running higher than the Fed’s 2% preference).
The latest sentiment readings show just how far the Fed has come in its inflation fight.
The question now is when the Fed will begin finally cutting interest rates. That pivot has been a moving target, with most investors only a few months ago in December anticipating that the Fed would have already cut by now.
Now, investors are divided on when the Fed will finally start trimming rates. It appears that the pivot is most likely to occur in June or perhaps at the Fed’s meeting in late July, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
Despite the high-interest rate environment, broader economic output has hummed right along. This week brought some more welcome news in the form of the latest gross domestic product report.
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GDP growth in the fourth quarter was revised up by 0.2 percentage points to a 3.4% seasonally adjusted annual rate, showing the economy ended 2023 in a stronger position than previously realized.
Additionally, the data showed the economy expanded 2.5% for all of last year combined — a healthy clip that matches the country’s annual GDP growth for 2019, the last year before the pandemic took hold.