Economy

Rising Consumer Sentiment in December Not Dominated by COVID-19

Consumer sentiment is on the rise. Despite a slowing economic recovery and a major spike in COVID-19 cases, the University of Michigan’s Index of Consumers rose to 81.4 in December’s preliminary report. November’s figure was down at 76.9, and the Wall Street Journal’s consensus estimate had the index falling to 75.5.

While much of the national attention is still focused on the coronavirus, consumer sentiment was not. It really boils down to politics.

It appears that the shift in politics may be the largest reason behind the unexpected gain. Friday’s report even specified that the Biden victory in November has raised optimism among Democrats and made Republicans more pessimistic. While it is a better than expected report, the actual index reading of 81.4 is still a full 18 percentage points under that in the same month of 2019.

The index tracking current conditions rose to 91.8 in December from an 87.0 reading in November. December’s preliminary index for expectations in the coming months rose to 74.7 from 70.5 in November. Looking back to December of 2019, the current conditions index was down 20.5 percentage points and the expectations index was down 16.0 percentage points.

There was a similar aberration in expectations after the 2016 election. The University of Michigan actually surmised that the post-election partisan shifts in expectations of the economy are too extreme to be justified by economic fundamentals. There also was a warning that these divergences may continue to be seen in the year ahead.

Consumers continue to see limited expectations for inflation ahead. After inflation rates of closer to 3% in September through November and over 3% in May through August, the December 2020 view was calling for just 2.3% inflation in 2021. That is the exact same reading from last December.

The rise in COVID-19 cases was handily overpowered by the political angle dominating the index. The index noted that there had been a 39.5 point rise in the Expectations Index among Democrats, versus a 34.9 point drop for Republicans. Friday’s report also addressed how the independent voters felt:

As has been documented in the past four years, self-identified Independents adopted more balanced views, maintaining their economic expectations in December at the same unfavorable levels as when the covid crisis began nine months ago. It was nonetheless surprising that the recent resurgence in covid infections and deaths was overwhelmed by partisanship. Most of the early December gain was due to a more favorable long-term outlook for the economy, while year-ahead prospects for the economy as well as personal finances remained unchanged.

As for the disconnect between partisanship and the actual economy, economic stimulus may weigh on the numbers ahead. Federal relief is expected to help prevent worse financial hardship to households. It would be expected to help small firms and local governments. That said, the payments would still not be expected to reach the beneficiaries for at least a month. That would put renewed hardships as a dominating factor this holiday season.

Friday’s strong upside in sentiment did not help boost the stock market very much. The Dow Jones industrials were still down about 105 points (0.35%) and the S&P 500 was down 25 points (0.7%) shortly before noon. The yield on the 10-year Treasury note was down more than two basis points at just above 0.88%.

The final take: The D.C. dysfunction may act as the grinch that stole Christmas!