Consumer Sentiment Improves Despite Financial Pressures

Consumer outlook improved in January, reversing some of the sharp deterioration seen at the end of last year, though the recovery remains tentative. The University of Michigan’s Index of Consumer Sentiment, reported on Friday (Jan. 23) rose to 56.4 in January from 52.9 in December, reflecting gains in both current conditions and expectations.

Even with the monthly improvement, confidence remains lower relative to early 2025. The headline sentiment index is more than 20% lower than a year ago, underscoring how persistent inflation pressures and uncertainty around the labor market continue to weigh on household psychology.

Prices Still Dominate the Mood

Much of January’s improvement stemmed from a modest easing in inflation fears rather than a broad sense of economic comfort. Year-ahead inflation expectations declined to 4.0%, down from December’s reading, offering some relief after months of stubbornly elevated expectations. Longer-term inflation expectations edged higher, suggesting consumers remain unconvinced that price stability has fully returned.

The Michigan survey noted that while consumers acknowledged recent slowing in inflation, many still felt that prices remain too high relative to income growth. That imbalance continues to shape how households approach everyday spending decisions, especially for essentials.

Confidence Is Lower Than Last Year

The year-over-year decline in confidence reflects more than temporary sentiment swings. Both the current conditions index and the expectations index remain sharply below their January 2025 levels, indicating that consumers feel worse about their financial position today and less assured about the future.

The survey’s commentary pointed directly to concerns about purchasing power and job security, noting that consumers increasingly cite the possibility of a softer labor market as a source of anxiety. While layoffs remain low, fear of income disruption appears to be exerting a disproportionate influence on sentiment.

The confidence data arrived alongside a slate of economic indicators that reinforce the cautious tone. Weekly jobless claims remain contained, signaling continued labor market stability. Meanwhile, GDP data confirms output remains solid, even as households express less certainty about their own finances. Separately, PYMNTS reported this week that on a real, inflation-adjusted basis, personal income growth has trailed expenditures.

Taken together, the data paints a picture of an economy that is expanding but not inspiring confidence at the household level, and that’s a disconnect that has persisted for much of the past year.

Financial Stress Remains a Key Constraint

That disconnect is evident in PYMNTS Intelligence’s latest Paycheck-to-Paycheck research. The January report shows that roughly two-thirds of consumers are living paycheck to paycheck, with a growing share doing so out of necessity rather than choice.

The financial buffers are thin. Fewer than half of consumers say they could confidently handle a $1,000 unexpected expense without falling behind on other obligations. Among those already struggling to pay bills, that confidence drops sharply.

This underlying financial fragility helps explain why improvements in consumer confidence have not translated into a stronger sense of security. When cash flow is tight, optimism has limited room to take hold.

Spending and Job Outlooks Remain Guarded

Looking ahead, both sentiment data and PYMNTS Intelligence findings suggest consumers are likely to remain deliberate in their spending. Households are still buying what they need, but discretionary decisions are increasingly filtered through concerns about income stability and unexpected expenses.

Job market conditions will remain a critical swing factor. As long as employment holds, consumer sentiment may continue to grind higher.