In May, U.S. consumer sentiment experienced a significant decline, reaching its lowest level in six months. The University of Michigan's consumer sentiment index fell to 67.4 this month from 77.2 in April, reflecting concerns about high inflation, interest rates, and potential increases in unemployment. Despite this drop, the current reading remains approximately 14% higher than a year ago.
Consumer outlook has been subdued since the onset of the pandemic, exacerbated by the spike in inflation observed in 2021. Consumer spending plays a vital role in driving economic growth, and the prevailing negative sentiment is also impacting President Joe Biden's reelection prospects.
While consumer confidence surveys may not always accurately predict actual spending patterns, economists suggest that the underlying economic conditions remain robust enough to sustain consumer expenditure. Rising incomes, particularly among higher earners who have seen significant gains in assets like homes and stocks, are expected to offset any potential retrenchment in consumer spending.
Despite the overall strength in consumer spending observed in the first quarter of this year, there are signs of caution among lower-income consumers, leading to a pullback in spending. Major retailers like Starbucks and McDonald's have reported challenges in sales growth, with customers showing reluctance to spend due to inflation concerns.
Inflation rates have remained elevated this year, prompting the Federal Reserve to signal its intention to maintain high-interest rates until inflation returns to its target of 2%. Consumers now anticipate inflation to remain at 3.5% over the next year, a significant shift from pre-pandemic expectations.
The decline in consumer sentiment was widespread across age, income, and education levels, affecting individuals across political affiliations, including Democrats, Republicans, and independents.
