The Current State of the American Economy

Economic Sentiment on the Rise

Recent reports have indicated a significant improvement in the attitudes of Americans towards the economy, driven by a notable slowdown in inflation. The University of Michigan's consumer survey revealed a remarkable surge in sentiment, marking a 13% increase from the previous month and reaching its highest level since July 2021.

Prospective buyers attend an open house at a home in San Francisco, California, US, on Saturday, Nov. 4, 2023.

The positive shift in consumer views can be attributed to growing confidence in the stabilization of inflation and the anticipation of stronger income expectations. Joanne Hsu, the university's Surveys of Consumers Director, highlighted the substantial 29% cumulative increase in sentiment over the past two months, the largest surge since 1991.

Homes in Pinole, California, US, on Tuesday, Dec. 26, 2023. Sales of previously owned US homes unexpectedly rose in November, led by a pickup in the South and representing a respite in a two-year downturn caused by higher borrowing costs and a lack of inventory. Photographer: David Paul Morris/Bloomberg via Getty Images

Inflation and Consumer Expectations

The easing of inflation throughout 2023, coupled with a minimal impact on unemployment, has contributed to a more optimistic outlook among US consumers. The University of Michigan's latest survey also indicated an improvement in consumers' expectations for inflation rates in the near future. This positive shift reflects a growing faith among Americans that inflation will eventually revert to more familiar levels.

Michael Badgley #17 of the Detroit Lions celebrates with the team after making a field goal during an NFC Wild Card Playoff football game against the Los Angeles Rams at Ford Field on January 14, 2024 in Detroit, Michigan.

Notably, the effects of lower inflation are being felt directly by consumers, evident in declining prices at the pump, and indirectly through wage increases outpacing inflation. Robert Frick, a corporate economist at Navy Federal Credit Union, emphasized the substantial influence of the strong job market on Americans' overall view of the economy.

Challenges and Optimism

While the recent survey showcased a sense of relief among consumers, there are lingering concerns and challenges. Despite the slowdown in inflation, prices remain significantly higher than pre-pandemic levels, posing a persistent challenge for many Americans. Additionally, the housing market continues to present obstacles, along with income inequality and rising debt, casting doubt on the attainability of the 'American Dream'.

However, amidst these challenges, there are positive indicators to acknowledge. The robust job market, with consistent job growth and low unemployment rates, provides a source of optimism for Americans. Retail sales have also demonstrated an upward trend, signaling consumer confidence in spending. Furthermore, the Federal Reserve's Survey of Consumer Finances revealed a surge in Americans' net worth, albeit with disparities in wealth distribution and housing affordability.