U.S. consumers are cheering up with Christmas approaching and appear set to put in a solid performance during the critical holiday shopping season.
Consumer sentiment has made a strong comeback since hitting lows during the October government shutdown, according to a new University of Michigan report Monday.
Sentiment as measured by the university index surged to 82.5 this month from 75.1 in November as worries about the federal shutdown waned and consumers focused more on the improving job and housing markets and their hopes for more plentiful jobs and income next year. After several bruising budget wars and a 16-day government shutdown, a bipartisan budget deal signed by President Obama last week is designed to fund government operations into 2015.
“The memory of the government shutdown has faded and most Americans seem to be looking ahead to the New Year with renewed optimism,” said Chris G. Christopher, economist at IHS Global Insight. He noted that consumer sentiment is more than 13 percent higher than December 2012’s level.
“The rapid improvement in sentiment is consistent with past episodes of brinkmanship, whereby such episodes pass through the consumer confidence surveys relatively quickly,” said Michael Gapen, economist at Barclays Capital.
“We expect improvement in housing and labor markets to keep confidence on a broadly upward trend,” he added.
The snapback in confidence already produced a strong month of spending in November, giving a solid start to the Christmas selling season. The Commerce Department reported Monday that consumer spending surged by 0.5 percent last month after rising by 0.4 percent in October.
The Commerce Department last week also revised upward the U.S. GDP growth numbers from the third quarter to 4.1 percent, well above economists’ expectations and the fastest quarterly growth since the end of 2011.
Reviving spirits have raised consumers’ appetites for spending, setting the stage to post a robust performance in the final quarter of the year. Consumer spending drives about 70 percent of economic activity and economists are predicting it will grow as strongly as 3.8 percent in the fourth quarter.
“The good news for many American households is that wage and salary gains have been outpacing consumer price increases since August, giving consumers some pricing power,” said Mr. Christopher.
He noted that gasoline prices and food prices have plummeted since the summer, while retailers have been offering deep discounts to lure shoppers in for Christmas sales, causing a rare dip in consumer inflation. The big break on prices is putting a wind at consumers’ backs.
Ted Weiseman, economist at Morgan Stanley, said his forecast for 3.8 percent consumer spending growth during the Christmas selling season “would be the best gain in three years.”
And because it nearly doubles the 2 percent pace of consumer spending in the first three quarters of the year, it shows that consumers and the economy have revved up their engines in the last few weeks and are moving into the new year with renewed momentum and energy.