The preliminary University of Michigan consumer sentiment index is up 4.9 points to 64.6 in January after a final 59.7 in December. The reading is above the consensus of 60.0 in an Econoday survey. It is also the highest since 65.2 in April 2022. Consumers' perceptions of current conditions are substantially improved and the outlook for six months from now a bit better as well. While the index level remains soft and consistent with consumers' caution about the economic outlook, it seems to have taken the first step on the road to recovery.

The current conditions index is up 9.2 points to 68.6, its highest since 69.4 in April. The expectations index is up 2.1 points to 62.0, its highest since 62.5. Consumers are responding to gains in household incomes and lower rates of inflation, a combination that could mean more disposable income.

The 1-year inflation expectations measure is down 4 tenths to 4.0 percent, its lowest since 3.4 percent in April 2021. The main factor is likely the reductions in commodities prices, particularly for energy. There is little change in the 5-year inflation index at 3.0 percent in early January after 2.9 percent in December. The reading is in line the last 20 months or so and suggests that consumers longer-term outlook for inflation remains steady and relatively modest.

Today's report easily beat expectations and leaves Econoday's Consensus Divergence Index at plus 10 to indicate that U.S. data have been, if only slightly, beating expectations on the whole.

Consumer sentiment is expected at 60.0 in the first reading for January versus 59.7 in December.

The University of Michigan's Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

This balance was achieved through much of the nineties and, in large part because of this, investors in the stock and bond markets enjoyed huge gains. It was during the late nineties that the consumer sentiment index hit its historic peak, reaching levels that were never matched during the subsequent 2001 to 2007 expansion nor during the long expansion following the Great Recession.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.