U.S. consumer confidence increased to a five-month high in December, with Americans growing more optimistic about current and future business conditions as well as the labor market, which could help to underpin the economy early next year.
The jump in confidence reported by the Conference Board on Wednesday occurred across all age groups and household income levels. Though consumers continued to worry about inflation, many were planning to buy motor vehicles, houses and major appliances like refrigerators and clothes dryers over the next six months.
More Americans also intended to go on vacations. The improvement in confidence was likely driven by rising stock markets, a decline in the average rate on the most popular mortgage from 23-year highs as well as lower gasoline prices. That fits in with economists' expectations that the economy would avoid a recession next year.
"Consumer spirits are perking up for the holiday season which is a sign Christmas is still coming this year," said Christopher Rupkey, chief economist at FWDBONDS in New York. "This makes us more optimistic that economic growth will continue to stay in the plus column in the coming year."
The Conference Board's consumer confidence index increased to 110.7 this month, the highest reading since July, from a downwardly revised 101.0 in November. Economists polled by Reuters had forecast the index would rise to 104.0 from the previously reported 102.0. The increase in confidence was largest among households in the 35-54 age group and with annual incomes of $125,000 and above.
The survey's present situation index, based on consumers' assessment of current business and labor market conditions, rose to 148.5 from 136.5 last month. Its expectations index, based on consumers' short-term outlook for income, business and labor market conditions, jumped to 85.6 from 77.4 in November, bouncing above 80, a level historically associated with a recession within the next year.
"The top issue affecting consumers remains rising prices in general, while politics, interest rates, and global conflicts all saw downticks as top concerns," said Dana Peterson, the chief economist at the Conference Board in Washington.
Consumers' 12-month inflation expectations fell to a more than two-year low of 5.6% from 5.7% in November, good news for policymakers. It mirrored a decline earlier this month in inflation expectations in the University of Michigan survey.
The Federal Reserve held interest rates steady last week and policymakers signaled in new economic projections that the historic monetary policy tightening engineered over the last two years is at an end and lower borrowing costs are coming in 2024. Since March 2022, the U.S. central bank has hiked its policy rate by 525 basis points to the current 5.25%-5.50% range.
U.S. stocks, which have seen strong gains inspired by rate-cut hopes in the last week, were trading marginally higher. The dollar was little changed against a basket of currencies. Prices of U.S. Treasuries rose.
LABOR MARKET RESILIENCE
With inflation cooling, consumers planned to boost spending over the next six months, according to the Conference Board survey. It showed an increase in the share of consumers intending to buy motor vehicles and major household appliances. The share planning a vacation was the highest in three years.
While there is not a strong correlation between confidence and consumer spending, the rise in buying and vacation intentions suggests that consumers should continue to support the economy, thanks to a resilient labor market.
The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, widened to 27.5 this month from 23.0 in November.
This measure correlates to the unemployment rate in the Labor Department's monthly employment report. The jobless rate fell to 3.7% in November from 3.9% in October.
"We were expecting a return to more normal holiday shopping patterns this season after two years of stimulus-fueled gains, but the surprisingly robust pop in consumer confidence suggests a possible merrier outcome, which could well carry into the new year," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.
The share of consumers planning to buy a house over the next six months was the highest since August. The rate on the popular 30-year fixed-rate mortgage has dropped from 7.79% in late October to an average 6.95% last week, according to data from mortgage finance agency Freddie Mac.
While retreating mortgage rates could offer a boost to the housing market, a chronic shortage of previously owned houses available for sale remains a constraint. This could lead to house prices increasing further next year.
Home resales, which account for a large portion of U.S. housing sales, dropped 7.3% on a year-on-year basis in November.
There were 1.13 million previously owned homes on the market last month, well below the nearly 2 million units before the COVID-19 pandemic. The median home price rose 4.0% from a year earlier to $387,600 in November.
"As a more dovish Fed implies even lower mortgage rates, we would expect further increases in home prices in 2024, with strength particularly into the spring buying season," said Veronica Clark, an economist at Citigroup in New York.
