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01:36 - Source: CNN
Minneapolis CNN  — 

Easing inflation and a strong labor market are helping consumers feel better about the economy this month, according to a closely watched survey released Friday by the University of Michigan.

The preliminary consumer sentiment index for February increased to 66.4 from 64.9 in January, the university reported Friday. That’s the best reading since January 2021, when the index read 67.2.

Economists were expecting the headline index to increase slightly to 65, according to consensus estimates on Refinitiv.

Sentiment has been buoyed by the recent cooldown in inflation and continued strong economic data — especially the job market, said Joanna Hsu, director of the university’s Surveys of Consumers, in an interview with Bloomberg TV on Friday. In January, the US economy added 517,000 jobs, and the unemployment rate dipped to 3.4%, the lowest level since May 1969.

“As long as consumers still believe that their incomes are going to remain strong, I think that will continue to lift consumer sentiment and their willingness to spend,” Hsu said.

However, the uncertain economic picture has many consumers still concerned about what’s coming. While the index measuring consumer sentiment about current economic conditions increased to the highest level since December 2021, the index of consumer expectations, which measures sentiment about where the economy will be in a year’s time and also five years’ time, dipped to 62.3 from 62.7.

“Consumers are very much bracing for a downturn, bracing for more unemployment, and so they are going to be continuing to be cautious with their spending,” she noted.

More than 40% of survey respondents said they believe unemployment will worsen in the year ahead, Hsu said. That share is up from 25% measured last year.

Another potential wild card could be the debt ceiling, she said. Three weeks ago, the US reached its $31.4 trillion debt limit set by Congress, and the Treasury has started taking “extraordinary measures” to avoid default as pressure grows for Congress to act.

Consumer sentiment took a hit during previous debt ceiling run-ups in 2011 and 2013, she said.

“It’s not really on the forefront of consumers’ minds right now, but as negotiations escalate, I do expect that to weigh on consumers’ anxiety over the economy,” she told Bloomberg.

The survey also showed that consumers are expecting inflation to remain high in the near term. One-year inflation expectations increased to 4.2% from 3.9% in January. Gas prices rising in recent weeks likely contributed to that rebound, Hsu said.

Long-run inflation expectations held steady at 2.9% for the third consecutive month.

Inflation expectations are crucial data points for the Federal Reserve. If consumers believe prices will remain high, that could factor in to increased wage demands, which could cause businesses to raise prices.

Sentiment, as measured by the university’s consumer surveys, has been on an upswing for three months. However, it’s still 22% below the historical average since 1978, according to the university.