Americans felt a mix of pessimism about the economy and increased confidence in December. The University of Michigan’s consumer sentiment index showed a notable boost in early December, reversing four months of decline. Despite earlier concerns related to mortgage rates and geopolitical events, the index reached its highest level since August.

Compared to a year ago, sentiment rose by approximately 14%, marking a notable increase from the all-time low in June 2022. The recent improvement was largely driven by growing optimism about inflation, which eased from 6.4% in January 2023 to 3.2% in October 2023.

Survey director Joanne Hsu noted a widespread improvement in sentiment across various demographics. Year-ahead inflation expectations decreased from 4.5% to 3.1%, reaching the lowest level since March 2021.

In December 2023, the consumer confidence index climbed to 69.7, a 14% increase from the previous month and a 16.5% jump year-over-year. That change reflected improved expectations about the economic situation in the coming six months.

That optimism may be attributed to a robust job market, with historically low unemployment rates persisting for nearly two years. Despite interest rate hikes, the economy has shown resilience, growing continuously, and the Federal Reserve indicated potential rate cuts in the coming year.

With that said, many in this economy may feel disillusioned — for good reason. Let’s dive into where consumer confidence has trended and what may right the ship moving forward.

Consumer Confidence Ended Well in 2023

December witnessed a rise in consumer confidence driven by improved views on business conditions and job availability. The surge in optimism cut across age and income levels, with the most significant gains observed among those aged 35 to 54 and households earning $125,000 and above. The predominant concern among consumers remains rising prices, while worries about politics, interest rates and global conflicts slightly decreased.

The perceived likelihood of a U.S. recession in the next 12 months decreased in December, reaching the lowest level for the year, though two-thirds still considered a downturn possible in 2024.

Also in December, assessments of the present situation saw positive views on business conditions and employment, though views on current family financial conditions were slightly tempered. Consumer expectations for the next six months increased, indicating improved confidence in future business conditions, job availability and incomes. The expectation of rising interest rates for the next year reached its lowest level since January 2021, while the outlook for stock prices rose to mid-2021 optimism levels.

Average 12-month inflation expectations decreased to 5.6%. Consumer views of expected family financial situations six months ahead improved. Monthly buying plans for autos, homes and big-ticket appliances moderately increased, ending the year on a slightly more positive note.

Is 2024 a Year to Be Optimistic?

Anticipating a rebound in 2024, U.S. consumer confidence, despite its unusual low, holds potential significance for political outcomes. The strong U.S. economy, absent the predicted 2023 recession, showcases robust employment, rising wages and positive prospects for the year ahead. Notably, crime rates, especially homicides, experienced a significant decline in 2023.

Americans, buoyed by confidence and economic optimism, exhibited robust spending during the holiday season, surpassing previous levels. Such positive sentiment often translates into increased expenditures, particularly on non-essential items like boats.

Consumer confidence, assessed through surveys, tends to mirror political affiliations, with Republicans often expressing skepticism during Democratic presidencies. Persistent low confidence may be more indicative of political divisions than genuine economic concerns.

What About Recession and Inflation?

Despite a recent uptick in confidence, Americans are not necessarily optimistic about the economy. Housing market challenges and the reliance on credit cards for sustenance indicate ongoing economic struggles.

The consumer confidence index reached its 2023 peak in July, experiencing a fall through the fall season. Despite a slight improvement in November 2023, expectations still suggest a historically recession-prone level for the coming year.

Consumer sentiment is vital, as consumption constitutes about 70% of the U.S. economy. Post-holiday shopping season insights will offer economists a clearer outlook for 2024. In November 2023, about two-thirds of surveyed consumers still believed a recession was probable within the next year, a slight decrease from the 71% in July.

Bottom Line

Gas prices may drop by 13 cents to $3.38 a gallon in the U.S., a second consecutive year of decline, according to GasBuddy.com. Chair of the White House Council of Economic Advisers’ Jared Bernstein noted a strong Christmas season with an 8% rise in restaurant spending and a 6% increase in online sales, contributing to a 3% overall retail spending increase.

Despite increased optimism, the Biden administration remains watchful of geopolitical risks. Ongoing conflicts, such as Russia’s war in Ukraine, Israel’s situation with Hamas and Houthi attacks disrupting trade, are potential concerns affecting global stability. Maersk temporarily halted Red Sea sailings after a Houthi attack on one of its vessels.

Bernstein highlighted significant increases in new businesses, particularly among people of color, indicating heightened optimism about the U.S. economy. The Biden administration monitored rising credit card debt but considered it returning to normal levels, given substantial wealth growth.

Overall, it appears different demographic groups have reason to moan or cheer, and a growing wealth and generational gap appear to be playing into the narrative this year. Painting all Americans with a broad brush is hard to do, but if inflation does come down as expected and interest rates decline following the data, perhaps we could be in for a much more optimistic year after all.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.