Consumers are starting to feel better about the economy.
The University of Michigan’s consumer-sentiment index registered 72.6 in July, the highest since September 2021.
That's a 13% increase from 64.4 in June, the biggest monthly increase since 2006.
And that's important, given that consumer spending accounts for more than two-thirds (68%) of the economy.
Enthusiasm about inflation’s slide and consistent job gains has boosted consumer spirits. “The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets,” the survey’s director Joanne Hsu said in a statement.
Consumer prices rose 3% in the 12 months through June, the slowest rate in two years and down from 4% in the 12 months through May.
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As for the labor market, it has been cranking out solid job gains for three years. Nonfarm payrolls gained 209,000 in June, and the unemployment rate totaled 3.6%, a very low figure by historical standards.
"Easing concerns about a recession, which had been garnering a ton of headlines in the media for most of the year, may have helped push sentiment and expectations higher," Oxford Economics' chief U.S. economist, Ryan Sweet, wrote in a commentary cited by Yahoo.
The survey’s forward-looking consumer-expectations component jumped to 69.4 from 61.5 in June.
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The sharp ascent of stock prices in recent weeks also lifted sentiment, according to Bill Adams, chief economist for Comerica Bank. The S&P 500 has soared 10% in the past two months.
To be sure, “consumers are still feeling burned after the surge in inflation in 2021 and 2022, with long-run inflation expectations a little higher than any time between 2012 and 2019,” he said.
The report showed that consumers expect inflation of 3.1% for the next five to 10 years.
But overall, “the survey suggests further progress on inflation in July,” Adams said. Consumers peg inflation for the year ahead at 3.4%, up from 3.3% in June.
Scott Murray, an economist at Nationwide, offered a mixed take on the survey. “The good news is that sentiment has roughly retraced half of its fall from prepandemic levels,” he wrote in a commentary cited by MarketWatch.
“For most Americans, a modest gain in income is expected. Still, durable goods buying conditions remain far off their recent levels. The rise in confidence seems restrained and clouds concern about forecasts of an economic downturn, which continue to linger.”
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