(Yahoo!Finance) - Americans are feeling increasingly better about the state of the US economy.
The latest University of Michigan consumer sentiment survey released Friday revealed a 13% jump in overall sentiment during the month of January. The index reading for the month came in at 78.8, its highest mark since July 2021, and well above economist expectations for a reading of 70.1.
The cumulative 29% climb in the sentiment index over the past two months is the largest two-month increase since the US economy recovered from recession in 1991.
"The sharp increase in December was no fluke," survey of consumers director Joanne Hsu said in a statement. "Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations."
The move higher in sentiment comes as the Nasdaq 100 reached a new all-time high on Thursday and all three of the major stock averages sit near record levels. The equity rally has been driven by a shift from investors fearing further interest rate hikes to debating when the Federal Reserve's first interest cut will come.
A so-called soft landing — where inflation returns the Fed's 2% target without a sharp economic downturn — has become close to a consensus call to begin 2024 as economists have become increasingly confident in inflation's path downward. This marks a stark reversal from the economic vibe at the start of 2023, when a recession was the consensus expectation.
Consumers are picking up on that trend, too. Year-ahead inflation expectations hit 2.9% in Friday's report, the lowest level since December 2020. Longer-run inflation expectations fell to 2.8%, down from 2.9% the month prior.
"Although the poor relationship with consumption growth means the resurgence in confidence doesn’t necessarily tell us much about the economic outlook, with confidence rebounding and inflation expectations falling, this is another sign that the economy is on track for a soft landing," Capital Economics deputy chief US economist Andrew Hunter wrote in a note to clients on Friday.
The shift in sentiment also signals a reversal in a pandemic era-trend many dubbed the "vibe-cession," in which Americans' feelings on the economy didn't match the strong data seen throughout most of 2023.
“Consumers’ persistent pessimism despite strong GDP and job growth has been one of the most bewildering components of the post-pandemic economy, but this divergence is now narrowing," Nationwide financial market economist Oren Klachkin wrote in a note to clients.
Recent readings on the state of the US economy have painted a strong picture, too.
A check on retail sales in December showed consumers finished 2023 in a better position than many economists feared. Building permits rose by more than expected in December, too. And while headlines about layoffs in various sectors have picked up in recent weeks, the hard data measurement of unemployment benefit claims recently hit its lowest weekly level since September 2022.
The data has projections for fourth quarter economic growth rising. And some economists feel that growth will continue into 2024.
Goldman Sachs chief economist Jan Hatzius told Yahoo Finance Live he believes the US economy will grow at annualized 2.3% in 2024, about 1 percentage point above what he believes is the consensus call.
And importantly, Hatzius doesn't think continued upside surprises in the economy will impact the Fed's rate-cutting plans.
"The driver of rate cuts in our forecast, and I would say in what Chair Powell said in the December press conference, is that inflation is coming back down to the target," Hatzius said. "If inflation comes back down to the target, there will very likely also be rate cuts because the 5.37% federal funds rate is going to just seem very, very high relative to an economy that's producing a 2% inflation rate."
By Josh Schafer · Reporter
Josh Schafer is a reporter for Yahoo Finance.
