That confidence is borne out by other recent metrics, including a Morgan Stanley survey showing consumer sentiment hit a five-month high in January.
Likewise, the percentage of American adults who expect their finances to be the same or better in a year is at 76.5%, the highest since September 2021, according to a New York Federal Reserve study released on February 12.
So what has changed in the last few months? Economists who spoke to CNBC Make It say it's likely the cumulative effect of wage growth, low unemployment and a slowdown in inflation. Some say stock market performance is also a factor.
“If you look at where we are today and where we were four years ago at the start of the Covid pandemic, we are in a much better place both economically and psychologically,” said Robert Johnson, professor of finance at Heider College of Creighton University business.
Here's a closer look at what's driving the recent surge in optimism among many Americans.
“Consumer sentiment has been low in 2022 and early 2023 despite good economic growth and a very strong labor market due to high inflation,” says boss Gus Faucher Economist at PNC Financial Services Group.
“But with easing inflation and strong wage growth, inflation-adjusted incomes are rising, giving consumers more purchasing power,” he says.
Since 2022, wage growth has helped soften the blow of higher consumer prices. Wages rose 5% in January 2024, a three-month moving average of nominal wage growth for individuals as measured by the Atlanta Fed's Wage Growth Tracker. Before the pandemic, the wage growth rate was closer to 3.5%.
The Americans who benefited most from these wage increases were middle- and low-income households, U.S. Treasury Department economists write.
In 2022, the Federal Reserve implemented a series of interest rate hikes to combat inflation. Because interest rate increases increase the cost of borrowing, they tend to slow the economy and can even push it into recession. This in turn would typically lead to higher unemployment rates.
So far that hasn't happened. While unemployment has increased slightly in recent months, it has remained at around 3.6% for the past two years – a historically low level.
“A lot of people were conditioned to expect a recession and we didn't see one – it boosted consumer confidence,” Johnson says.
The S&P 500 index gained 25% in 2023, a remarkable turnaround after posting losses of nearly 20% in 2022.
“Perhaps one of the biggest influences on consumer sentiment is the wealth effect due to the tremendous performance of the stock market,” says Johnson.
The wealth effect is a theory in behavioral economics that suggests consumers spend more and become more confident when their wealth increases, even if their income doesn't increase, Johnson says.
Considering that 58% of Americans owned stocks in 2022, they may be feeling more confident about their economic prospects.
However, not all economists believe that stock market performance is a major factor in improving consumer sentiment.
The impact could be a secondary factor, but “I'm not sure that will boost consumer confidence in this case,” Jonathan Ernest, an assistant professor of economics at Case Western Reserve University, tells CNBC Make It.
Wage growth, slowing inflation and low unemployment are the main factors driving greater optimism among Americans, Ernest says.
It's worth noting that while consumer sentiment has improved, this is only compared to the pessimism of previous years. For example, consumer sentiment in Michigan is still about 20 percentage points below pre-pandemic levels.
And while progress has been made in containing inflation, the inflation rate of 3.1% is still well above the Fed's stated target of 2%.
Inflation figures were higher than expected in January. As a result, the Fed's rate cuts are expected to be delayed until later in 2024, rather than in March as some observers had believed.
The stock market also faltered last week amid news of higher-than-expected inflation. This primarily reflects uncertainty about the economy and persistently high interest rates, which could trigger a recession.
Therefore, expect “sentiment to adjust accordingly in the coming weeks,” says Erin Sykes, chief economist at Nest Seekers International.
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