Consumer confidence has surpassed expectations in December and increased by the most in years, good news for the economy heading into the new year.
The Conference Board’s consumer confidence index rose to 110.7 in December, up from 101 the month before, the group announced on Wednesday. That is the biggest increase since early 2021, and, for reference, economic forecasters predicted it would only rise to 103.8.
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The expectations index, which tracks consumers’ short-term outlook for income, business, and labor market conditions, increased to 85.6 this month from 77.4 in November.
Notably, the expectations index has ticked above 80, which is a level that typically signals a recession within the coming year, according to the Conference Board. Consumers’ perceived likelihood of a recession is the lowest it has been this year, although two-thirds of consumers still perceive a downturn as possible in 2024.
“December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months,” said Dana Peterson, chief economist at the Conference Board.
“Consumer expectations for the next six months also increased in December, reflecting improved confidence about future business conditions, job availability, and incomes,” she added. “Expectations that interest rates will rise in the year ahead plummeted to the lowest levels since January 2021, and consumers’ outlook for stock prices rose to levels of optimism last seen in mid-2021.”
The new consumer confidence readings are good news for the Federal Reserve, which is finishing up a historic tightening cycle designed to drive down too-high inflation, which has torn through the economy and been a scourge for consumers.
Inflation has trended down over the past year, and the consumer price index is now running at 3.1% in November, still above the Fed’s 2% goal but far lower than the highs notched in 2022.
The labor market has remained above water despite the higher interest rates. The economy again beat expectations in November and added nearly 200,000 more jobs, and the unemployment rate dropped slightly to 3.7% — a healthy level by historical standards.
Gross domestic product growth, a measure of overall economic output, has also remained very strong.
A revision to the third-quarter GDP projections released last month showed that economic growth expanded at a 5.2% seasonally adjusted annual rate, the strongest growth since the pandemic rebound and, before that, 2014.
Still, things are expected to slow down next year as the full magnitude of the Fed’s rate hikes continues to filter through to the broader economy.
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The Atlanta Fed’s “GDP Now” tracker predicts that GDP growth in the final quarter of this year will be 2.7%.
Projections from top Fed officials are that GDP will slow to 1.4% in 2024. Fed officials also predict that unemployment will rise to 4.1% by the end of next year.