(Feb 15): U.S. consumer sentiment rebounded by more than forecast from a two-year low, suggesting recent weak retail sales will be a temporary blip after the government shutdown ended and the Federal Reserve signaled it would hold off on interest-rate hikes.
The University of Michigan’s preliminary February sentiment index rose to 95.5, exceeding the median forecast in a Bloomberg survey for an increase to 93.7. The measure of current conditions rose 1.2 point, while the expectations gauge jumped 6.3 points, indicating the rise in sentiment was concentrated in the outlook.
Confidence remains elevated compared with historical levels, though it’s below average for the period since Donald Trump was elected president.
The gauge may stabilize as the government skirts another shutdown and U.S. trade negotiators work toward a new deal with China. Sentiment may be getting a boost from muted expectations for prices and rate hikes, as fewer respondents saw borrowing costs rising.
Consumer expectations for inflation in the next five to 10 years fell to 2.3%, matching the lowest in the past half century, while the expected rate in the coming year dropped to the lowest since 2017.
The low inflation expectations will make it even harder for Fed officials to justify raising borrowing costs, Richard Curtin, director of the Michigan survey, said in a statement.
The central bank monitors the Michigan expectations gauge closely. One measure showed consumers were the most optimistic on their finances since 2004, as 44% anticipated improvement and 8% expected a worsening, according to the report.
A measure of buying conditions for long-lasting goods rose, while sentiment on consumers’ current finances ticked down to the lowest in a year.
Cleveland Fed President Loretta Mester said in a speech on Tuesday that she is watching consumer confidence.
“We will need to keep a close eye on whether household sentiment weakens so much that people postpone spending or whether they remain cautiously optimistic,” she said. Interviews for the report were conducted Jan 30 to Feb 13. The five-week shutdown ended Jan 25.