Strong Consumer Sentiment – Will Be The Savior Of The U.S. Economy

Embark on a journey through the intricate dynamics of the U.S. economy in 2024, where “Strong Consumer Sentiment – Will be the Savior of the U.S. Economy.” This comprehensive exploration delves into the factors shaping the nation’s outlook, starting with a critical analysis of the recent decline in inflation and the Federal Reserve’s signals that have fueled optimism among Americans.

Introduction

The sharp decline in Inflation comes after the persistently high inflation, the blow which came from the lingering pandemic devastation, and the fears of an impending recession have dampened sentiment toward the economy in recent years, despite its solid growth and steady hiring.

As inflation declines and the Federal Reserve has signaled that interest rate hikes are over now, the Americans are showing their upbeat. And fears of a recession in 2024 are declining thanks to the strong labor market which keeps money in the bank accounts of consumers for their increased spending.

According to the Michigan Survey, Consumer sentiment increased by 13% in the First Half of January since December 2023, this is an increase after a sharp rise in the previous month. The increase in sentiment was widespread, reaching consumers of all ages, incomes, educational backgrounds, and geographies.

In this article we are going to discuss the Gap between consumer sentiments and Economic Fundamentals also will try to give a glimpse of the Economic Outlook for 2024. Let’s get started….

The Gap Between Consumer Sentiments And Economic Performances/Fundamentals – An Analysis

There is always a gap between consumer sentiments and Economic performance. It is hard for many people to understand why it happens and what kind of explanation can be provided. 

However, many may wonder why many positive performances of macroeconomic fundamentals do not influence consumer sentiments as much as a limited negative element does.

One of the main reasons for the gap is the displeasure of the current state of the economy vis-à-vis the future economic opportunities. It is hard to say whether the consumer will look for the present state of the economy for budgeting their income and expenditure or will look for future economic prospects. 

Another reason for the gap may be due to geopolitical and social concerns. As there is a geopolitical crisis happening the consumption pattern as well as the prices of certain goods get affected/changes. Therefore, consumer sentiments also vary. Social concerns like life expectancy, Festivals, Marriages, etc… also change consumer sentiments. This is not something new for economics, but very difficult to ascertain it. 

Sometimes, hopefully not always, negatively biased news sources change the perception of consumers on economic performances. Former White House economists, Ryan Cummings and Neale Mahoney termed this aspect as “asymmetric amplifications”, the central premise of this theory is that a more pessimistic tone of economic news will make American households believe that the economy is weaker than actually it is which will lower the sentiment in household surveys.

Adam Hale Shapiro, Moritz Sudhof, and Daniel J. Wilson in their working paper titled “Measuring News Sentiment”  concluded and stated that “We considered two economic research applications using this news sentiment index. First, we investigated the extent to which daily news sentiment can help predict consumer sentiment releases, finding that news sentiment is highly predictive. Second, we estimated the impulse responses of key macroeconomic outcomes to sentiment shocks, at the monthly frequency. Positive sentiment shocks were found to increase consumption, output, and interest rates and to temporarily reduce inflation.”

This shows how news coverage can influence consumers too. According to the San Francisco Fed’s Daily News Sentiment Index, articles related to the mood of the economy have increased since November – the highest since 2018.Neale Mahoney in his article Digesting Inflation said that “If inflation next year slows to 2.5 per cent, the negative impact on consumer sentiment from inflation would decline by another 50 percent relative to the current value.”

The Daily News Sentiment in the Time of COVID-19, by the Federal Reserve Bank of San Francisco shows that in January 2024, consumer sentiments are upbeat (it is depicted in a graph below)

Higher values indicate more positive sentiment; lower values indicate more negative sentiment.

Source: Federal Reserve Bank of San Francisco

Economic Outlook For 2024 And Factors That Matter

There are several factors which are showing positive and lifting Americans’ spirits. They are 

1. Unemployment – unemployment is low and hiring is still strong. Historically it is low. However, we expect there may be some increase in unemployment by the end of the first quarter. 
2. Inflation – Inflation was cooling down till December, 2023. In January 2024 it has again raised marginally to 3.4% from 3.1% in December 2023. 
3. Market – S&P 500 touched a record high on Friday (i.e. 19^th January 2023).
4. Housing and Mortgage – Mortgage rates have come down low. According to Fannie Mae’s index, the home-buying sentiment jumped by 10% in December (Year on Year). This is partly due to the share of consumers’ expectations of lower mortgage rates over the next year. 

There are other factors which may influence the economy along with these four factors. The reason for mentioning only these four factors is these are the main factors which influence consumer sentiments along with interest rates. Interest Rate cuts are always on the cards this year.

Our Perspective/Conclusion

There are still risks around the corner of the economy. The full impact of Interest rate increases is yet to be witnessed. If there was an impact on the economy front in terms of growth, unemployment and inflation then the U.S. economy may enter recession this year. If the Fed holds the interest rates for longer, despite not having much impact on earlier raises, then it will have an impact on consumer sentiments and, as a result, will have an impact on the economy as a whole. As the interest rate cuts mainly depend on inflation and other economic performances like unemployment, it is too early to rejoice. 

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