Key Points at a Glance

  • Consumer confidence rose this month despite ongoing concerns about high prices and the job outlook, according to a survey released Friday by the University of Michigan.
  • One-year inflation expectations declined but remained above January 2025 levels, Joanne Hsu, director of the university's Surveys of Consumers, said in a statement. Meanwhile, most consumers expect the unemployment rate to rise this year.
  • "Sentiment is still more than 20% below a year ago, and consumers continue to report pressure on their purchasing power from high prices and a potentially weakening labor market," Hsu noted. The survey's confidence index rose to 56.4 from 52.9 last month.

Deep Insights

Recent data suggests the outlook for the economy and consumer spending is improving. The Atlanta Federal Reserve said Thursday that fourth-quarter gross domestic product (GDP) could grow at an annual rate of 5.4%. According to data from the U.S. Bureau of Economic Analysis (BEA), the economy grew at an annualized rate of 4.4% in the third quarter.

The unemployment rate fell to 4.4% in December from 4.5% in November. Additionally, the Labor Department said Thursday that initial jobless claims for the week ending January 17 rose by only 1,000 to 200,000, below expectations. The four-week moving average of claims fell to a two-year low.

Meanwhile, according to the BEA, the Federal Reserve's preferred inflation gauge is on track to fall below the 3% forecast policymakers set for 2025. Excluding volatile food and energy prices, the personal consumption expenditures (PCE) price index rose 2.8% year-over-year in November, below the 3% forecast Fed officials made last month for 2025.

Despite concerns about price pressures and the labor market, BEA data shows consumer spending grew at an annualized rate of 3.5% in the fourth quarter. Consumer spending accounts for about 70% of U.S. economic growth.

However, U.S. households do not seem to fully embrace this good news. Hsu said consumers' expected income growth rose slightly this month but remained below late-2024 levels. Additionally, about 62% of consumers expect the unemployment rate to rise over the next 12 months.

"These pessimistic views of the labor market are widespread, felt by consumers across income groups," she said. Hsu also noted that the share of households spontaneously mentioning high prices hurting their living standards rose to 45% from 34% a year ago.

When asked to assess economic conditions, two in five consumers spontaneously mentioned the Trump administration's tariff policies. According to Fed officials, inflation from import taxes should begin to ease after June.