In May, U.S. consumer sentiment plummeted to a six-month low, reflecting growing apprehension among households about the escalating cost of living and persistent unemployment. The University of Michigan's report indicated a notable decline in consumer sentiment, spanning across various demographics and political affiliations.
Michael Pearce, deputy chief U.S. economist at Oxford Economics, noted the volatility of consumer confidence on a month-to-month basis and its limited impact on consumer spending in recent years. Pearce emphasized that consumer spending resilience hinges on robust household balance sheets and a thriving labor market, suggesting that significant economic weakness would only manifest if the latter falters significantly.
The preliminary reading of the overall index of consumer sentiment by the University of Michigan stood at 67.4 in May, marking its lowest level since November 2023, compared to April's final reading of 77.2. Economists had anticipated a preliminary reading of 76.0, attributing part of the variance to the ongoing transition from telephone surveys to web-based interviews, estimated to have affected the headline index by approximately 2 points this month.
Recent economic indicators revealed a slowdown in first-quarter economic growth and a decline in hiring in April, prompting consumer worries about inflation, unemployment, and potential adverse movements in interest rates in the near future.
Despite some stability in gasoline prices and a positive trend in stock market prices, economists struggled to explain the sentiment downturn fully. Factors such as the upcoming election, geopolitical tensions like the Israel-Iran conflict, and non-economic events like pro-Palestinian protests on college campuses were considered possible contributors to the decline.
Inflation expectations for the upcoming year rose to 3.5% in May from 3.2% in April, surpassing pre-pandemic levels. While economists anticipate a moderation in consumer prices in April following three consecutive months of robust readings, inflation remains above the Federal Reserve's 2% target.
Financial markets anticipate the Federal Reserve to initiate its easing cycle in September, although some economists remain skeptical due to lingering inflationary pressures. The Fed, which maintained its benchmark overnight interest rate last week, is unlikely to adjust rates unless inflation shows sustained movement towards the 2% target.
Conrad DeQuadros, senior economic advisor at Brean Capital, underscored the significance of anchored inflation expectations in the Fed's assessment. With long-term inflation expectations hovering near the high end of the range deemed acceptable by the central bank, policy decisions will continue to be scrutinized amid ongoing uncertainty regarding the inflation outlook.