Consumer sentiment edged up 3 tenths from January's flash to end the month at 64.9, implying a level slightly over 65 in the final two weeks of the month. Assessments of both current conditions and expectations are improving.

Also improving are inflation expectations. The year-ahead reading is down 1 tenth from mid-month and down 5 tenths from December and, at 3.9 percent, is at its lowest level since all the way back in April 2021. The 5-year rate, which has remained admirably stable throughout all the years of trauma, is also down 1 tenth from mid-month to match its December rate at a very favorable 2.9 percent.

Various sentiment and confidence readings remain well below where they were three years ago but relative to their pandemic and wartime levels, improvement is tangible. Also tangible is the aggregate strength of the economy, at plus 22 on Econoday's Consensus Divergence Index to indicate that US data continue to exceed economist expectations.

Consumer sentiment is expected to end January at 64.6, nearly 5 points above December and unchanged from January's mid-month flash.

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.