Sentiment ticked up in December. The index moved from 51.0 to 52.9 technically an improvement, but only after months of steady deterioration from the mid 70s earlier in the year. That context matters. When sentiment is this low, small moves up often say more about exhaustion than optimism. People aren’t suddenly feeling good, they’re just feeling slightly less bad.
What really jumps out is how depressed the level still is. At 52.9, sentiment is nowhere near a healthy expansionary range. Historically, readings like this are consistent with periods when households are cautious, defensive, and slow to commit to big purchases.
The split between now and later tells you everything
Dig into the components and the story gets clearer. Current conditions fell again, from 51.1 to 50.4, while expectations rose to 54.6. That’s not confidence, that’s coping.
In plain terms…people don’t like how things feel today, but they’re hoping next year is easier. That pattern shows up late in cycles, when the present is tight but consumers are leaning on the idea that rates will fall, inflation will cool, or policymakers will ride to the rescue. Hope is doing more work than income growth.
Inflation expectations are cooling but prices are still the villain
The chart makes this painfully obvious. One year inflation expectations have fallen from the spring peak above 6% to 4.2%, and five year expectations eased to 3.2%. That’s real progress on expectations.
But here’s the catch…consumers don’t experience inflation as a forecast. They experience it as a price level. The red line in the chart, the share of consumers blaming high prices for poor personal finances stays elevated even as inflation expectations fall. That’s the disconnect policymakers keep running into.
Slower inflation doesn’t feel like relief when groceries, rent, insurance, and utilities are still far above where they were a few years ago. Disinflation helps the future, but it doesn’t repair the damage already done to household balance sheets.
Why this matters for the economy going forward
This is not the psychology of a consumer ready to drive growth. It’s the psychology of a consumer trying to preserve flexibility.
When sentiment is this low and current conditions are weakening, spending becomes selective. Households still spend on necessities, but they delay upgrades, discretionary durables, and anything that feels optional. That lines up with what we’re seeing elsewhere with softer big ticket demand, pressure on lower income households, and more sensitivity to rates and credit availability.
It also means the economy has very little emotional cushion. If the labor market softens or credit tightens further, sentiment doesn’t have far to fall and historically, that’s when pullbacks in spending accelerate.
My View
Inflation expectations are improving, which helps the Fed. But consumer morale remains stuck near cycle lows because prices are still high and incomes haven’t fully caught up. That combination of cooling inflation but persistent frustration is exactly what you see before growth slows further, not before it reaccelerates.
The consumer isn’t panicking, but they’re not confident either. They’re bracing. And economies rarely surprise to the upside when households are stuck in that mindset.