Consumer sentiment unexpectedly improved in January as Americans felt Washington's deal to avert the "fiscal cliff" at the beginning of the year boded well for the economy, a survey released on Friday showed.
The Thomson Reuters/University of Michigan's final reading on the overall index of consumer sentiment rose to 73.8 from 72.9 in December, topping economists' forecasts for 71.5.
It also marked an improvement from early January's 71.3 preliminary figure, which had been the lowest level in over a year. Survey interviews were done before data earlier this week showed the economy contracted in the fourth quarter.
The agreement reached in Washington earlier in January averted the full brunt of tax increases and spending cuts that had been set to come into effect. But taxes did increase for some Americans, and a 2 percent reduction in payroll taxes came to an end.
"The payroll tax increase has had a significant impact on spending among lower income households," survey director Richard Curtin said in a statement.
Politicians still face a round of budget decisions in the first half of the year, including large automatic federal spending cuts that are looming as of March.
While the recent negative gross domestic product reading is unlikely to cause a significant downturn among consumers, the spending cuts that are set for next month are "a more plausible candidate," said Curtin.
Consumers were nearly equally split on the economy's prospects in 2013, with 28 percent expecting it to improve and 24 percent expecting it to worsen.
The barometer of current economic conditions eased to 85 from 87, while the gauge of consumer expectations climbed to 66.6 from 63.8.
One-year inflation expectations edged up to 3.3 percent from 3.2 percent, while the survey's five-to-10-year inflation outlook held steady at 2.9 percent.
(Reporting by Leah Schnurr; Editing by Chizu Nomiyama)