Consumer sentiment falls sharply in May amid recession worries
U.S. consumer sentiment fell sharply to 57.7 in May, a decline that reflects a notable darkening in the outlook for an economy is showing increasing cracks in its foundation.
Both the current economic conditions index and the index of consumer expectations declined in May as consumers digested mixed data on the economy that was exacerbated by three of the four largest bank failures in U.S. history occurring over the past few months. The Index of Consumer Expectations, which reflects consumers’ views for the economy six months out, was particularly shaken, falling sharply to 53.4 from a reading of 60.5 in April.
After steadily increasing from its summer trough that coincided with the June peak in inflation, consumer sentiment has been gradually eroding since February. Elevated interest rates, along with fundamental worries in the regional banking sector, have contributed to a pronounced tightening in credit conditions.
Notably, it’s not just the recent tightening of bank lending standards that’s restraining credit growth; borrowing demand has also subsided. Surging interest rates have undoubtedly been a significant factor, but the growing talk of recession is also likely causing consumers to think twice about major purchases.
On a positive note, progress on the inflation front has been encouraging, with the most recent CPI report showing signs of disinflation within the services sector. This has been a primary focus as consumption has shifted toward travel and leisure, fueled by solid wage growth and a considerable stockpile of savings stockpiled since 2019.
Although the pullback in inflation is a positive sign, it’s being offset by other evidence that economic activity is faltering. Coming off a year of aggressive interest rate hikes, there are growing signs that the economy is feeling the effects of tighter conditions. Job creation has slowed and layoffs are up, suggesting that the strong jobs engine that has underpinned consumer spending may be stalling. More recently, turmoil in the banking sector and the standoff in Washington D.C. over the debt ceiling have inserted additional risks into an already tenuous outlook.
The bottom line? Consumers have proven resilient despite the corrosive effect of inflation and sharply higher borrowing costs. With labor markets easing, the banking sector showing signs of stress, and a fiscal standoff in Washington D.C., the drumbeat of negative headlines has intensified. Can consumers continue to endure? The May sentiment report suggests that their stamina, like the economy itself, is losing momentum.
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