You May Feel Better About Your Finances, But Not Enough to Spend More

Consumers are more upbeat about the economy, but have cut back on spending.

Consumer sentiment rose to the highest level in nine months as inflationary concerns have eased, but Americans have not rushed to make purchases.

The index that measures the outlook of consumer financial situations rose to 64.6 from a revised 59.7 in December, the University of Michigan said.

The sentiment from consumers remains lackluster as the index is well below the pre-pandemic high of 101 and a peak of 88.3 in April 2021 during global pandemic amid shutdowns,

In December the index rose to 68.6 while a year ago it climbed to 72.

Household Savings Levels Remain High

Households have maintained their savings levels by restraining their spending, said Torsten Slok, chief economist at Apollo Global Management, a New York-based high-growth alternative asset manager.

"The Fed just released new data for the amount of money households have in their checking accounts and short-term deposits and it shows that households across the income distribution continue to have a higher level of cash available than before the pandemic," he wrote.

No Spending Surge

Consumers have likely cut back on spending, which has improved their savings levels. High inflation rates on energy, food and rent prompted many consumers to adjust their budgets as the Federal Reserve continues its rate hikes.

"The speed with which households are running down their cash balances in recent quarters has been very slow," Slok said. "Combined with continued solid job growth and robust wage inflation, the bottom line is that there remains a powerful tailwind in place for US consumer spending."

Despite the improved sentiment, consumers are refraining from making purchases, wrote Tim Quinlan, senior economist at Wells Fargo Securities, and Shannon Seery, an economist at Wells Fargo Securities.

"Relief on the inflation front and wage growth are lifting spirits, but still-sour buying conditions suggest the good vibes in this report may not translate into a spending surge," they wrote.

Consumer concerns about their finances have fallen slightly as gasoline prices have declined.

Gasoline prices were over $4 a gallon during their peak and have fallen steadily since the summer months.

Consumers are paying $3.26 on average per gallon, which is down 5 cents from a week ago, but up 5 cents from a month ago, said Patrick De Haan, head of petroleum analysis at GasBuddy, the Boston provider of retail fuel pricing information.

Diesel is selling for $4.62 a gallon on average, which is a decline of 7 cents a gallon during the pat week. 

Gasoline prices have risen only slightly as demand returns. The lowest price for gasoline is in Texas with an average of $2.79 a gallon. 

Housing Costs Are Still High

Housing costs remain a threat to household budgets as mortgage rates remain high with this week's average of 6.3%, according to Freddie Mac.

"The euphoria did not extend to the housing market," Quinlan and Seery wrote."Home buying conditions improved slightly but are still very near the lowest levels on record."

High interest rates have served as a roadblock to consumers making larger, more costly purchases such as a car or a home since it increases monthly payments.

"Elsewhere, buying conditions improved somewhat in January, potentially on the back of some recent reprieve in inflation, but a majority of households still view it as a bad time to buy a major household item or vehicle," they wrote. "We take this as a sign that higher financing costs are weighing on the purchases of these traditionally bigger ticket items. More plainly, the good vibes in this report may not translate into a spending surge."