Consumer sentiment rose for the second consecutive month in January

The collective consumer mood has been lifted as inflation gauges have fallen.

U.S. consumer sentiment improved dramatically in January, reflected by a solid bounce in the University of Michigan Consumer Sentiment Index. Today’s revision lifted the January index reading to 64.9 from a preliminary reading of 64.6 while still confirming an uptick from 59.7 in December.

Sentiment has now risen for two consecutive months but, more notably, has improved considerably from its June low of 50.0. Falling inflation and better GDP numbers in the latter half of the year were a source of encouragement, providing some glimmers hope of a return to greater price stability and the potential for a soft landing, but there’s still a pervasive caution about what could lie ahead.

It’s important to maintain perspective; the collective mood may be improving, but it’s far from optimistic. There’s still a keen awareness of the risk that lies ahead, although the sigh of relief from easing inflation pressures is meaningful.

Strong labor market fundamentals and solid wage growth have helped to sustain consumers that were battered by rapidly rising prices through much of last year. With various gauges of consumer inflation now falling from midyear peaks, there’s at least a sense that the near-term risks have diminished. Nonetheless, consumers recognize that it’s too soon to signal the “all clear” for the economy.

Near-term consumer expectations have remained more subdued. The Index of Consumer Expectations edged higher in January, but the improvement was comparatively muted. Growing recession risk — and what that could mean for household finance, jobs, and personal income — remain center stage. With two-thirds of survey respondents indicating concern about a potential slowdown in the coming year, the question is whether they will further pare spending in anticipation of recession.

Ironically, what could make sense for individual households could create a self-fulfilling prophecy if it became widespread. Given the critical importance of household consumption to the overall strength of the economy, a more cautious mindset and tightening of the proverbial purse strings could exacerbate the risk and hasten the onset of a recession. The resiliency of the labor market notwithstanding, the breadth of leading indicators that point to a potential downturn ahead can’t be overlooked. For now, it still appears that the probability of a recession remains high. It’s not as much a question of “if,” but “when,” “how severe,” and “how long.” That alone is likely to keep a lid on sentiment in the coming months.

The bottom line? Consumers are feeling a little better but remain wary about near-term recession risk. Better inflation data is a relief, but the near-term outlook is still overshadowed by risk — a fact that isn’t lost on consumers who remain cautious in their assessment for the months ahead.

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