Up, down and all around: A 2023 review of Animal Spirits

Summary

• The Animal Spirits Index (ASI) had a strong close to 2023, shooting up by 0.51 points in December. In all, the ASI was somewhat volatile throughout 2023, largely reflecting the surprising turn that the year took.

• While oscillating consumer confidence and economic policy uncertainty weighed heavily on the ASI, financial markets showed remarkable strength and boosted the index throughout the year.

• We suspect 2024 will bring continued volatility in the ASI. While we expect the FOMC to begin their cutting cycle this year, which will likely boost the index, a pull back in consumption may accelerate the labor market's moderation, which could weigh heavily on the ASI via lower consumer confidence.

A year in review

The Animal Spirits Index had a strong close to 2023. The index shot up by 0.51 points in December, marking the largest increase since February 2019. Strong gains in both the consumer confidence and S&P 500 components of the index drove the uptick. In all, the ASI was somewhat volatile throughout 2023, trending up until August, then sharply decreasing through November, and finishing out with a year-end rally in December. Our previous reports detail the methodology of the index, but on a basic level, an ASI value above zero indicates optimism and a value below zero suggests pessimism.¹

The ASI’s changing nature largely reflects the surprising turn that 2023 took. By the end of 2022, the Federal Reserve had hiked rates by 425 bps, leading many to believe 2023 would see sluggish growth and a modest recession. Yet, even as the Fed continued to hike rates through last summer, the economy remained surprisingly resilient. Real income growth remained strong, which helped to boost real consumer spending; payrolls continued to expand and inflation slowed considerably. In all, real GDP expanded 2.5% in 2023—an outstanding performance compared to the 0.3% growth rate predicted by the Blue Chip consensus at the beginning of the year. In this report, we dive deeper into how the components of the ASI changed throughout 2023 and provide a brief outlook for what to expect in 2024.

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