Friday was the busy day of economic data.
Consumer confidence in the U.S. has seen a significant improvement as it jumped in January to its strongest level since mid-2007 thanks to strengthening job market and lower gasoline prices.
The preliminary January reading of the University of Michigan/Thomson Reuters consumer-sentiment index rose to an 11-year high of 98.2 from a final December reading of 93.6, according to the report Friday. Economists had predicted an increase to 94.1.
“The economy is on a very solid footing beginning the new year,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose confidence forecast was the closest in the Bloomberg survey. “We continue to generate jobs at a fairly rapid clip, and what you’re also seeing is consumers’ response to what I call a tax cut from lower gasoline prices. That frees up a lot of spending and that means they can purchase other goods and services.”
Steady growth in hiring and a drop in gasoline prices influenced a positive change in attitudes of more Americans this month than at any time in the more than five-decade history of the Michigan survey. Consumers also said they were willing to buy a car, providing an indication that the December drop in retail sales could not stay for long.
“Gains in employment and incomes as well as declines in gas prices were cited by record numbers of consumers,” Richard Curtin, director of the Michigan Survey of Consumers, said in a statement. “More consumers spontaneously cited increases in their household incomes in early January than any time in the past decade.”
Another report showed U.S. manufacturing output declined unexpectedly in the month of December as warmer-than-usual temperatures reduced demand for heating and global economies struggle for traction. Output at manufacturers rose 0.3 percent last month following a 1.3 percent November gain that was the strongest since February, the Federal Reserve said on Friday. Still, the December figure brings the fourth consecutive month of growth and was above the median estimate for 0.2 percent growth.
“The U.S. is kind of the motor of growth globally at the moment,” said Michael Carey, chief economist at Credit Agricole CIB in New York, who correctly projected the gain in factory output. “The U.S. has the tailwinds from the consumer spending coming from the decline in energy prices.”
Meanwhile, the Fed said capacity utilization, which measures the amount of a plant that is in use, fell to 79.7 percent last month from a revised 80.0 percent in November.
Economists were looking for capacity utilization to edge down to 80.0 percent as compared to the 80.1 percent originally reported for the previous month.
Consumer prices in the United States were pushed into their biggest decline in six years in December thanks to slumping costs for energy, a separate report from the Labor Department showed. The decline in cost of living could help delay the Federal Reserve’s retreat from its stimulus campaign. The consumer-price index saw a decrease of 0.4 percent, the sharpest monthly drop since December 2008, after falling 0.3 percent in November.
The “core” reading of inflation, excluding volatile food and fuel, was unchanged in December versus a gain of 0.1% in prior month. Economists were looking for core inflation of 0.1%. Core inflation remained 1.6% during last year.
“With core inflation unlikely to fall much below December’s 1.6%…and headline inflation to rebound to 2.0% early in 2016, the Fed will still raise rates this year,” said Paul Dales, senior U.S. economist at and Capital Economics. “Since lower gasoline prices provide a net boost to activity, core inflation is unlikely to fall much further.”
The U.S. economy seems strong in 2015. But, uncertainty is high across the other parts of the world. China is slowing down, Japan is faltering, and Europe is coping with deflation. These are all America’s big trading partners, so what happens overseas have an impact on the US as well.
Central banks in all of these economies are likely to declare easy monetary policy. On Thursday, the European Central Bank is expected to announce its launch of quantitative easing (QE).