Consumer Sentiment Sours in May — Evening Brief – 05.24.24
The final May reading of the University of Michigan’s Consumer Sentiment Index fell 10.5%, or 8.1 points, to 69.1, a shift from three months of minimal change in consumer opinions. However, it was higher than the preliminary reading of 67.4. Economists predicted the index to remain unchanged from its preliminary reading.
“This 8.1 index-point decrease is statistically significant and brings sentiment to its lowest reading in about five months,” Joanne Hsu, director of the Surveys of Consumers, said. “The year-ahead outlook for business conditions saw a particularly notable decline, while views about personal finances were little changed.”
Inflation expectations increased to 3.3% in May from 3.2% in April, albeit they fell short of the 3.5% preliminary reading. Meanwhile, five-year inflation forecasts were reported at 3%, up from the preliminary reading of 3.1%.
“While consumers recognize that realized inflation has eased substantially since 2022, a considerable share of consumers still express the burden that high prices exert on their lives,” Hsu said.
The current conditions gauge decreased to 69.6 in May from 79 the prior month. A measure of expectations fell to 68.8 from 76.
As well as high prices and borrowing costs, which create concerns about the cost of living, respondents became apprehensive about labor markets, which had remained relatively strong for much of the previous year despite frequent news of layoffs and strikes.
According to Hsu, expectations declined sharply this month. Approximately 38% of consumers now expect the unemployment rate to climb in the coming year, up from about 32% in the previous five months.
Consumers also believe the Federal Reserve is less likely to cut interest rates in the coming year. Only one in four expects an interest rate cut, compared with 37% in January. Purchasing conditions for durable goods fell to a one-year low, while consumers’ perceptions of their current financial status were the weakest in five months.
About four in 10 respondents blamed high prices for eroding living standards. “These deteriorating expectations suggest that multiple factors pose downside risk for consumer spending,” added Hsu.
Some economists read the decline in sentiment in May as evidence that consumers have grown weary of inflation and may cut back on spending, which may lead the economy to stagnate dramatically, as evidenced by a flat reading on retail sales in April.