The University of Michigan consumer sentiment index is at 74.0 in the preliminary report, up 2.2 points from 71.8 in November. The index is above the consensus of 73.0 in the Econoday survey of forecasters. The report noted that there is an ongoing"re-calibration" in consumer attitudes in the post-election period. The increase in December is due to a jump in the present buying conditions component where consumers were looking ahead to increased tariffs and deciding to buy now before prices rise.

The current conditions index is up 13.8 points to 77.7 in December after 63.9 in November. It is the highest since 79.0 in April, just before the uncertainty and gloom around the presidential election set in. On the other hand, the expectations index is down 5.3 points to 71.6 in December after 76.9 in November and reflects a less positive outlook for consumers about six months from now.

The one-year inflation expectations measure is at 2.9 percent in December, up three tenths despite moderation in energy prices. As noted above, consumers are anticipating that prices will go up for household goods if new tariffs are imposed. The five-year inflation expectations measure dips a tenth to 3.1 percent and within the narrow range of readings that has been in place since April. Consumers are expecting inflation to remain about unchanged both in the short- and medium-terms.

When the FOMC meets on December 17-18, policymakers will take into consideration that inflation expectations while generally well-anchored are simply not sustainably coming down. If the November inflation numbers are consistent with a stall in disinflation in the fall of 2024, it could mean policymakers will turn a bit more cautious about future rate cuts.

Consumers have been feeling better as inflation has receded and the job market has held up well. Expectations call for another uptick in sentiment to 73.0 from 71.8 in November and 70.8 in October.

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.