Between November 2023 and January 2024, American consumer sentiment has jumped 29%. That is the largest two-month gain in the 30 year history of the University of Michigan’s consumer sentiment index. Vibes are good in the US economy right now. Which leads to two big questions. Firstly, how did it turn around so quickly? And secondly, will it last?
This article from Business Insider seeks to answer both of these questions.
“Data-wise, the economic landscape today is not wildly different than it was, say, six months ago. The job market remains strong, inflation is coming down, consumer spending is solid, GDP growth continues, etc. But vibes-wise, something has changed in recent weeks. Americans are suddenly confident in the economic future again. So what gives?”
According to the author, America has seen three big changes in the past two months: a soaring stock market, falling gas prices and cheaper eggs.
Starting with the stock market, the S&P 500 index hit record highs in January which has everyone feeling good. For those that own stocks (and in our retirement accounts that is almost all of us), there is a wealth effect. Even for those that don’t own stocks, the positive headlines create a view that the economy is going well. And that positive sentiment flows through the economy, convincing consumers to spend and businesses to invest.
The second factor is gas (petrol) prices, which are perhaps the biggest driver of consumer sentiment. Fuel prices are the one price in the economy that are constantly advertised in big billboards on the side of the road. Meaning that whether you own a car or not, you’re aware of how prices are changing. Fuel is also a largely inelastic cost – however prices change, you’re going to drive to work and drop the kids at school. So when prices are high, consumers can’t stop consuming, meaning they really feel the price change. In 2022, the national average for a gallon of fuel in the US ticked over $5 a gallon, a record high. That fell to $3.446 in 2023 and is currently at $3.096 according to AAA.
Those two factors – the stock market and gas prices – are obvious drivers of consumer sentiment. Eggs are less obvious. The author makes the case that of all food items, shoppers are more familiar with the price of eggs rather than other items in the supermarket. And egg prices are falling. According to the US Bureau of Labor Statistics a dozen grade-A eggs cost $4.25 in December 2022. By December 2023, they were down to $2.51. Whether or not you agree with eggs being the most well-known supermarket item (we would think milk and bread top that list), the fact is they are not alone is getting cheaper (or at least slowing their price increases).
So things are getting better and vibes are improving. But there is a risk they could turn. Consumers are feeling the pinch of higher interest rates which could impact their spending and when it comes to egg prices in particular, bird flu re-emerged in the US in late 2023. Economists shouldn’t be counting any of their chickens just yet.
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