Consumer sentiment remained subdued in May
U.S. consumer sentiment slipped in May, as persistent inflation and growing recession risk were exacerbated by the looming deadline in Washington, D.C. for policymakers to reach a deal to raise the debt ceiling and avoid a potential default.
Today’s update from the University of Michigan’s survey of the consumer mood reconfirmed the dour mood, although the reading nudged modestly higher to 59.2 from its previous 57.7 reading. While a negligible positive at the margins, the index still points to an exceptionally subdued consumer outlook that rarely occurs in the absence of a recession.
Not coincidentally, the last time that sentiment plumbed these depths without a recession was in 2011 — the last time that a federal debt ceiling showdown reached this point. The result then was the decision by Standard & Poor’s to downgrade the nation’s credit rating by a notch. In recent days, there have been rumblings that Fitch Ratings could take a similar step as Washington moves perilously close to the deadline to get a deal done. History doesn’t repeat, but it often rhymes.
Notably, the outlook for the economy over year ahead plunged in the past month. Some have noted that this might be the most widely anticipated recession ever, as the economic sugar high from massive fiscal and monetary stimulus since 2020 quickly fades. Economists have been talking about the risk for over a year now, and it certainly hasn’t been lost on American consumers.
Also notable was last month’s steep decline in the collective mood of middle-income households, which contribute more than any other income group to consumption — the lynchpin of the U.S. economy. Despite that pessimism, an interesting dichotomy has emerged, in which consumers are particularly glum about their broad outlook for the economy but are less dire in the assessment of their personal financial situation. The former suggests an awareness of potentially tougher economic conditions ahead, while the latter may be enough to keep consumers spending in the near term. The question is how long that might continue.
With unemployment at a half-century low and job creation still solid, the uptick in layoffs in recent months hasn’t yet caused alarm. The Fed’s tightening measures have been aimed squarely at loosening up labor markets, pushing unemployment up. A more pronounced weakening in labor markets could be the catalyst for consumers to start to rein in spending and prepare for a tougher environment.
The bottom line? In aggregate, consumers are still sitting on a stockpile of cash accumulated in recent years that could allow them to continue spending for some time, despite sticky inflation that continues to push prices higher. Their increasingly gloomy outlook for the economy suggests that a tipping point may be coming for consumer spending, although the timing remains very much in doubt. Job market conditions may hold the key.
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