The University of Michigan consumer sentiment index jumps 8.1 points higher to 69.4 in the preliminary December report from 61.3 in November. The December reading is the highest since 69.5 in August. The reading is well above the consensus of 61.9 in the Econoday survey of forecasters. In early December, consumers were significantly more positive in their outlook for both current and future conditions. The main cause seems to be relief that inflationary pressures continue to ease and that interest rates have peaked.

The current conditions index is up 5.7 points to 74.0 in December from 68.3 in November. It is the highest since 75.7 in August. The six-month expectations index is up 9.6 points to 66.4 in December from 56.8 in November and is the highest since 68.3 in July.

The evidence of relief for inflation is in the inflation expectations measures. The 1-year inflation expectations reading is down sharply to 3.1 percent in December after 4.5 percent in November and is the lowest since 3.1 percent in in March 2021. The five-year inflation expectations reading is down to 2.8 percent in December after 3.2 percent in November and is the lowest since 2.8 percent in September, which in turn is the lowest since 2.8 percent in July 2021. While it is too soon to say that consumers are more optimistic about the inflation outlook, it does appear they see progress in the easing of price pressures.

Editor's note: the preliminary sentiment report is usually released at the end of the second week of any month, but given the approaching holidays was released at the end of the first week this month. This fairly raises the question of sample size and would seem to raise the risk of sizable revisions when the final data are released on December 22.

Consumer sentiment in December, which in November fell 2-1/2 points to 61.3, is expected to edge marginally higher to a still depressed 61.9.

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.