Surveys Finds Improving Personal Finances, Business Conditions Lift Consumer Sentiment

Consumer sentiment lifted 11% in June, reaching its highest level since October 2021, a sign of greater optimism as inflation continued to ease and stock market performance strengthened.

Sentiment is now about halfway between the all-time historic low of 50 from June 2022 and the February 2020 pre-pandemic reading of 101, a reflection of the material improvement in the economic experiences of consumers relative to the peak of high inflation last year, according U-M economist Joanne Hsu, director of the Surveys of Consumers.

“This month’s marked improvement in sentiment was seen across all demographic groups with the notable exception of lower-income consumers, who anticipate continued challenges from inflation and a potential weakening in labor market prospects,” Hsu said. “However, aggregate consumer spending is more heavily influenced by higher-income consumers, whose favorable views will continue to support robust spending.”

Personal finances of consumers on upswing
Consumers’ views of their personal finances surged this month. Assessments of their current living standards climbed 13% from June, reaching its highest reading since April 2022. Consumers expect these improvements to continue; the year-ahead expected change in personal financial situations rose 5% from last month and reached their most favorable reading since January 2022, primarily due to strong expectations from middle and higher income consumers.

Their views are buoyed not only by cooling inflation but also continued strength in labor markets, Hsu said. Consumers generally expect unemployment rates to remain low over the next year, and a majority of consumers expect their incomes to rise at least as much as inflation.

Business outlook improves
Consumers reported a substantial increase in the favorable news they heard on business conditions, particularly on labor markets, prices and the economy in general. This has passed through to consumers’ outlook over the economy. The one-year economic outlook rose 15% and the five-year outlook increased 18%. Both readings were the highest since December 2021. These views were attributable not just to the continued slowdown in inflation but also expectations of improvements in labor market conditions for both workers and businesses, Hsu said.

Consumer Sentiment Index
The Consumer Sentiment Index rose to 71.6 in the July 2023 survey, up from 64.4 in June and above last July’s 51.5. The Current Index rose to 76.6, up from 69.0 in June and above last July’s 58.1. The Expectations Index rose to 68.3, up from 61.5 in June and above last July’s 47.3.