There’s still a long way to go, but American consumers are starting to feel better about the economy.
The monthly University of Michigan Consumer Sentiment Index hit 72.6 in July, the highest reading since September 2021.
By comparison, the index, which surveys people on general business conditions and how they are doing financially, remains below the high of 101 it reached in February 2020, just before the start of the covid-19 pandemic.
But the sentiment measure is now up eight of the last 11 months.
In an interview ahead of publication on Friday, the index’s director, Joanne Hsu, said the gauge remains closely linked to inflation. With price gains slowing from their June 2022 highs, it makes sense that a pick-up in sentiment is underway, she said.
“Although many consumers are still preparing for a possible recession in the future, they have noticed how inflation has cooled and their views have improved,” he said.
Consumers still find current prices and expenses too high, Hsu said. And the latest reading of the index found that inflation expectations a year from now were little changed from last month.
But inflation is not the only consideration: the strong job market is also helping boost confidence, Hsu said. At 3.6%, unemployment is at record lows. The so-called Misery Index, which adds the unemployment rate to the inflation rate, is now close to pre-pandemic levels.
While there is almost uniform agreement among economists that the United States is not in a recession, certain segments of the American public do not seem to believe it, especially Republicans.
Party affiliation is one of the strongest determinants of views on the economy, Hsu said, with Michigan’s index now at 96.7 among Democrats compared to 49.3 among Republicans (among independents, it’s 71, 5).
Historically, people who identify with the out-of-power party in the White House rate the economy lower than those who share the president’s party, Hsu said.
In fact, the Michigan index shows that sentiment among all three political affiliations is now trending higher.
Still, the partisan gap has rarely been this sharp, Hsu said.
Other surveys show similar breakdowns. For example, Gallup finds that while overall, Americans rate the economy negatively, Republicans rate it at -65, while independents are at -35 and Democrats are in positive territory at +5.
Even when improved economic data is released, it can take years for people to significantly change their minds about the economy, said Jeff Jones, a senior editor at Gallup. After the 2008 global financial crisis, sentiments about the economy didn’t really improve until around 2012, even though economic growth technically bottomed out in the spring of 2009.
While earnings growth now outpaces inflation, the improved purchasing power only amounts to a few cents. And the cumulative price increase of the post-pandemic era has been almost 20%.
“Historically, we have seen that it takes people a while to realize when the economy has improved,” he said.
