According to the University of Michigan’s preliminary consumer sentiment survey, US consumer sentiment dropped sharply in early May. The Consumer Sentiment Index fell to 50.8, down from 52.2 in April. This large decrease in household confidence suggests that consumers are becoming more cautious about the state of the economy. The index missed market expectations by a wider margin, pointing to an increased level of uncertainty among consumers about their financial situation going forward.
US Dollar Index ( DXY ) was trading around the 100.80 area, gaining a bit even as sentiment soured. The Greenback had a muted, but positive knee jerk reaction to the data, reflecting the fact that traders are still assessing the broader economic implications. Even though the overall index didn’t budge much, the drop in consumer confidence is worrisome when it comes to future short-term spending and economic growth overall.
The Current Conditions index also saw a steep plunge, which the survey called out as significant, falling to 57.6 from 59.8. This change is indicative of a larger trend, in which consumers appear to be growing more pessimistic about their current financial health. Further, the Consumer Expectations sub-index declined, from 47.3 to 46.5, meaning consumers expect even worse in the months to come.
That weakening sentiment is in line with more general worries about inflationary pressures hitting the nation’s households. It’s a transitional time, as consumers are starting to feel very nervous. Their one-year inflation expectation jumped to 7.3%, an increase of 0.8% from 6.5%. This increase indicates that consumers are beginning to expect persistent inflation, which can reduce consumers’ real spending ability and harm overall economic confidence.
Though the Consumer Sentiment Index hit a 12-year low, not everything in the survey was negative. The short-term expectations for local economic conditions increased to 7.3%, up from 6.5%. In contrast, the five-year outlook increased only modestly, up to 4.6% from 4.4%. These three big jumps indicate that consumers are already getting squeezed in the near term. Yet in spite of that, they have reason to be optimistic about long-term economic growth.
The decline in consumer confidence highlights a critical juncture for the US economy as households grapple with inflation and uncertainty. Since consumer sentiment is the foundation of economic activity, any drop in it can be profoundly impactful. Given the severity of this dip, we hope to see policymakers and businesses alike make strategic pivots to inspire consumer confidence.