Consumer worries drop sentiment to 6-month low to start May

The debt ceiling crisis is weighing on consumers, erasing gains made in recent months.


Consumer sentiment dipped to a six-month low to begin May, as worries about the economy renewed and the debt ceiling debate delivered another dose of uncertainty into the American public.

According to the University of Michigan, sentiment fell 9% in the first May reading. This metric had been climbing steadily since hitting a historic low last June. But the preliminary May reading erased half of the gains made in recent months.

There were precipitous falls across the survey. Year-ahead expectations fell 23%, while long-run expectations were down 16%.

Consumers are seeing more negative news about the economy, and the federal debt ceiling standoff between Republicans in Congress and US President Joe Biden is particular cause for alarm.

“Throughout the current inflationary episode, consumers have shown resilience under strong labor markets, but their anticipation of a recession will lead them to pull back when signs of weakness emerge,” University of Michigan Survey of Consumers Joanne Hsu wrote. “If policymakers fail to resolve the debt ceiling crisis, these dismal views over the economy will exacerbate the dire economic consequences of default.”

There are also signs that consumers believe inflation will stay higher. Long-run inflation expectations hit their highest reading since 2011, rising to 3.2% from 3% in April. Meanwhile, year-ahead expectations dipped slightly to 4.5% after a 4.6% reading in April that UMich described as “spiking.”

This result comes after the latest Consumer Price Index data showed that inflation cooled only slightly in April to 5%. GlobalData Managing Director Neil Saunders wrote of a “frugal mindset” taking shape among consumers."

Nevertheless, there was one sign this week that there could be more relief on the way on inflation. The Producer Price Index, which measures wholesale inflation, rose 2.3% on an annual basis. That's a further cooling from 2.7% in March. The PPI is seen as a forward-looking indicator of inflation.

a chart showing consumer sentiment(Consumer sentiment, 2013-2023)

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