Consumer Sentiment Rises to Highest Level Since April
The University of Michigan’s index of consumer sentiment rose in early December to its best reading since April, boosted by more positive views among Republicans and independents following the election of Donald Trump.
The index climbed 3.1 percent to 74, the fifth straight monthly improvement. The index of current conditions soared by 22.6 percent, boosted by a surge on consumers taking a more positive view of buying conditions for consumer durables, offsetting a small decline in the expectations index rooted in the views of Democrats that Trump will be bad for the economy.
Joane Hsu, the director of the University of Michigan consumer surveys, said that the surge in buying conditions was not a sign of economic strength. Rather, she said it’s “primarily due to a perception that purchasing durables now would enable buyers to avoid future price increases.” Not unrelated, Democrats in December raised concerns that Trump’s policies—especially tariffs—would lead to a resurgence of inflation.
That helped push up the year-ahead inflation expectations from 2.6 percent in November to 2.9 percent in December, the highest reading in six months.
If Democrats act on this view that prices are going higher and that it is therefore better to make big purchases now, the result could be a burst of consumer spending around the holidays and the new year. That could have the beneficial effects of leading to stronger employment gains and stronger profits as Trump takes office. The worry, however, is that it could also push prices higher at an accelerated rate, causing the very inflation it is attempting to front run.
Fortunately, the view that tariffs will trigger higher inflation is largely confined to Democrats. Republicans in the survey said they expect Trump will “usher in an immense slowdown in inflation,” according to Hsu. As a result, Republican confidence that prices will not be rising and purchases can be delayed without much risk might offset the inflationary pressure created by the Democrat fear and loathing of Trump trade policies.
Current Conditions Improve Across the Board, Democrat Expectations Sink
The view of current conditions improved across the board. There was a 16 percent rise in the index of current conditions among Democrats, which is likely related to their view that it is a good idea to make big ticket purchases ahead of tariffs that Trump may impose. Among independents, the current conditions index rose 37 percent. Perhaps counter-intuitively, the rise was smallest among Republicans—just a 15 percent improvement. This is likely a reflection of many Republicans still thinking the economy is suffering from nearly four years of Democrat rule.
The decline in the expectations index is entirely due to a crash among Democrats. The index for Democrats fell from 75.4 to 48.7. As recently as this spring, when many Democrats assumed Biden would win the presidential contest, it was above 100. So, Democrat optimism has been cut in half.
Expectations improved, however, among both independents and Republicans. Among independents, the expectations index is the highest it has been since March. Among Republicans, it is now the highest it has been since March of 2020. That kind of optimism could prove a powerful fuel for the engines of economic growth in the coming year.
When looking at these divergent reactions to the election, it is important to keep in mind that this is more than just partisan politics. Democrats are not just saying they think the economy will stink because they’re upset about Trump winning. They genuinely think Trump’s policies will lead to higher prices and a worsening of economic conditions. Similarly, Republicans are not just being boosters for Trump. They expect economic conditions to improve. Although there is a partisan tilt to consumer sentiment, it reflects the observations and expectations of economic fundamentals.
