This key economic indicator rose for the first time in months

The Consumer Confidence Survey, which is the first of two key economic reports due out this week, was released on Tuesday, showing a sliver of light that helped raise most markets. For the first time since January, consumer confidence improved after three straight months of declines.

It’s too early to know if the rising consumer confidence is a sign that inflation has slowed further. However, we’ll learn more about the state of the economy on Friday, when the Bureau of Economic Analysis releases the latest Personal Consumption Expenditures index, the key gauge that the Federal Reserve uses to track inflation. 

Consumer Confidence on the rise

The Consumer Confidence Survey tracks consumer attitudes, buying intentions, and expectations for inflation, stock prices, and interest rates. As such, it serves as an important indicator of current business conditions and likely developments for the months ahead.

The good news is that consumer confidence rose significantly in May to a score of 102, up from 97.5 in April. It is the first month since January that this gauge rose, although it is still down considerably from January, when it was 114.8.

Nonetheless, the 102 score beat economists’ expectations, as they had generally expected consumer confidence to decline again in May, as indicated by the median expected score of 96.

There are two parts to the survey. The Present Situation Index (PSI) climbed to 143.5 in May, up from 140.6 in April. Meanwhile, the Expectations Index (EI), which focuses on expected future confidence, rose even higher, to 74.6 from 68.8.

The latter is typically the more important measure, and the results are mixed. The fact that it rose so sharply indicates that consumers feel much better about where things are headed.

On the other hand, the EI gauge is still at a low number. The Conference Board, which administers the survey, said an EI score of below 80 typically signals that a recession is ahead.

“Compared to last month, confidence improved among consumers of all age groups,” said Dana Peterson, chief economist at The Conference Board. “In terms of income, those making over $100K expressed the largest rise in confidence. On a six-month moving average basis, confidence continued to be highest among the youngest (under 35) and wealthiest (making over $100K) consumers.”

Recession fears remain

The next PCE index report on inflation isn’t due to be released until Friday. However, the Consumer Confidence Survey did contain some insights into what consumers are seeing with regard to inflation.

For example, in the May Consumer Confidence report, consumers cited prices, especially for food and groceries, as having the biggest impact on how they view the U.S. economy. Additionally, the average 12-month inflation expectation climbed slightly to 5.4% from 5.3%.

Based on that outlook, it is not surprising that the share of consumers expecting higher interest rates over the year ahead rose to 56.2% from 55.2%. Further, despite the slightly improved consumer confidence, when asked about the likelihood of a recession over the next 12 months, the score rose in May, the second consecutive month.

The one area consumers feel especially good about is the stock market. The survey showed that 48.2% of consumers expect stock prices to increase over the year ahead, compared to 25.4% anticipating a decrease and 26.4% predicting no change.

The markets were mostly up on Tuesday, led by a 106-point (0.5%) gain in the Nasdaq Composite. The S&P 500 and Russell 2000 were both up slightly (0.1%), while the Dow Jones Industrial Average had fallen about 240 points (0.6%) as of Tuesday afternoon.