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Consumer sentiment rose unexpectedly in December

December 21, 2022 Blog 1 min read
Authors:
Jim Baird Wealth Management
December consumer confidence surprised to the upside, but can it be sustained? The jobs market may hold the answer in the months ahead.

Consumer Confidence Index - History chart

Recession risks may be rising, but growing evidence that inflation pressures are finally easing was enough to lift some of the gloom that has hung over the consumer sector for much of the year.

The Conference Board’s measure of consumer confidence rose unexpectedly to 108.3 in December — easily surpassing the consensus forecast for 101.0. The increase was driven by a more upbeat assessment of the current state of the economy and a little less gloom about the outlook for 2023.

The strength of the labor market is a critical driver of the collective consumer mood. When unemployment is low and jobs are plentiful, the underpinning for household spending and outlook tends to be more positive. That appears to be the case today despite a recent uptick in layoffs and other clear evidence that recession risk is rising.

That doesn’t tell the whole story though; employment conditions have been an unambiguous bright spot for the economy over the past year, even as GDP turned negative early in the year and the one-two punch of inflation and rising interest rates hit American pocketbooks.

What’s changed? Inflation is still high but receding from its summer peak. The Fed is still raising rates, but all indications are that the end of the tightening cycle may be within sight. The light at the end of the inflation/interest rate tunnel appears to be enough to provide more than a glimmer of hope for consumers that have tired of paying more on every successive trip to grocery stores, gas stations, or restaurants.

Even so, consumers remain understandably restrained in their outlook for 2023. The expectations index rose from 76.7 to 82.4 — a solid increase in a relatively brief period — but remains near recession levels. Can the improving trend in confidence be sustained? It will be a challenge, particularly with so many leading indicators pointing toward greater weakness in the months ahead.

The bottom line? Better inflation readings have been a source of relief for consumers, but the growing risk of recession will be the next challenge that’s coming into view. Employment conditions may hold the key. If job creation stalls and layoffs mount, any nascent resurgence optimism could prove to be short lived.

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