Americans are feeling optimistic about the economy again, with some exceptions

American consumers haven't felt this good about the direction of the economy in years.

This may signal the end of what some have come to call the “sentiment slump,” where, despite decades-low unemployment and low inflation, there is still something uncomfortable about the economy.

First, University of Michigan Monthly reconnaissance US consumer sentiment jumped 13% in January to its highest level since July 2021 — with a cumulative two-month increase of 29% representing the largest consecutive increase since 1991, when the recession was about to end.

And the Federal Reserve Bank of New York Survey of Consumer Finances The December data, published earlier this month, showed that perceptions of households' current financial situations had improved, with fewer respondents reporting that their circumstances were worse than they were a year ago.

Views on the state of the economy remain strongly polarized along political party lines. While the Democrats recorded their current economic situation at 106.5 In a University of Michigan poll — which was among the highest ratings on record — Republicans gave it a score of 61.9; Independents came in at 77.2.

At 78.8, the overall rating for the economy remains well below the scores seen just before the pandemic.

But sentiment is now just 7% lower than the 1978 historical average, Michigan poll reveals. The latest results show that Democrats and Republicans alike express their most positive readings since the summer of 2021.

Analysts say the upward trend in sentiment is now clear and unambiguous.

“With confidence rebounding and inflation expectations falling, this is another sign that the economy is on track for a soft landing,” Andrew Hunter, deputy chief U.S. economist at research group Capital Economics, wrote in a note to clients after the consumer sentiment survey. Published Friday.

The upward trend in sentiment was driven by continued strength in the labor market coupled with easing concerns about inflation. The Labor Department reported Thursday that weekly initial jobless claims fell to 187,000 — the lowest level since September 2022. The unemployment rate, at 3.7%, is at pre-pandemic levels.

A New York Fed survey showed that the strength is likely to continue. Evidence of this can be found in the average probability of a rise in the unemployment rate in the United States a year from now; The poll showed the probability falling by 1.4 percentage points to 37.0%.

The average probability of losing a job in the next 12 months fell by 0.2 percentage points to 13.4%.

As for inflation, the Bureau of Labor Statistics reported last week that price growth continues to slow — and sentiment survey releases showed that American consumers expect that trend to continue. The Federal Reserve Bank of New York said average inflation expectations for the next 12 months reached the lowest level on record since January 2021.

Consumers are finding lower prices in gas stations and grocery aisles and responding accordingly, said Joe Brusuelas, chief economist at consulting firm RSM.

“As we continue to see inflation in the economy decline, what that means is that real wages will improve,” Brusuelas said. “As real wages improve, sentiment will change, and you see that.”

Elements of the economy remain fundamentally unchanged – and in some cases worse off – than before the pandemic. Although price growth has slowed, price levels remain well above 2019 levels. An important factor driving persistent inflation has been that overall labor force participation has shrunk significantly, from 63.3% in the winter of 2019-2020 to the current level. 62.5%. This equates to millions of US residents exiting the labor force, resulting in higher wages that drive up the prices of both goods and services.

Until recently, inflation growth outpaced even this rapid wage growth. A New York Fed survey showed that earnings expectations actually fell last month to the lowest reading since April 2021.

As with the University of Michigan poll, the New York Fed report shows deep divisions in views of the economy based on demographics. The decline in earnings expectations was led by individuals with the most high school diplomas; For those with a college degree, earnings expectations are unchanged. Similarly, levels of job insecurity rose among those with at most a high school diploma, but remained weak for those with at least some college and university graduates.

Mark Zandi, chief economist at Moody's, said political divisions are proving to be the main driver of disagreement over an economy whose trend lines all appear to be pointing in the right direction.

“Inflation is moderate, stocks are at record levels, home prices are at record levels, and interest rates are about to start fluctuating,” Zandi said.

While debt service levels are more variable depending on socioeconomic status, he added, “the average American can look around and say this is a good economy — extraordinarily good — you almost have to pinch yourself — and hopefully it stays that way.” “. “For a longer period.”