Consumer Sentiment Hits 6-Month Low at 66.5, Inflation Fears at 3.5%

Key Takeaway

• U.S. consumer sentiment plunged to a six-month low of 66.5 in May, significantly missing expectations and indicating potential economic weakness.
• Inflation expectations surged to 3.5%, surpassing the Fed's 2% target and previous forecasts, signaling growing consumer concerns about inflation.
• Following the report, the S&P 500 trimmed gains, while the dollar and Treasury yields saw slight increases, reflecting market sensitivity to consumer outlooks.

Consumer Confidence Plummets

The University of Michigan's latest report highlighted a significant downturn in consumer sentiment, marking a 13% decline to a six-month low. The consumer sentiment index dropped from 77.9 in April to 66.5 in May, starkly missing the anticipated 76. This downturn is notable as it represents the lowest sentiment reading since November 2023. The sub-indexes also saw declines, with consumer expectations falling to 66.5 from 76 and current conditions to 68.8 from 79, both missing their forecasted figures. This decline in consumer confidence suggests potential weakness in household finances and raises concerns about future spending.

Inflation Expectations Rise

Adding to the economic gloom, the report showed an increase in both short-term and long-term inflation expectations among consumers. Year-ahead inflation expectations escalated from 3.2% to 3.5%, surpassing the expected 3.2% and remaining above the pre-pandemic range of 2.3-3.0%. Long-term inflation expectations also rose, indicating sustained concerns over inflationary pressures. This uptick suggests that consumers are bracing for higher costs, with potential implications for spending and saving behaviors.

Market Reactions

Following the release of the University of Michigan’s Consumer Sentiment report, there were immediate reactions in the financial markets. The S&P 500, as tracked by the SPDR S&P 500 ETF Trust, slightly trimmed its daily gains, indicating that the gloomy consumer outlook has begun to weigh on investor sentiment. Meanwhile, the dollar experienced a marginal uptick, likely buoyed by the hotter-than-forecasted consumer expectations data. Treasury yields edged higher, affecting bond-related ETFs such as the iShares 20+ Year Treasury Bond ETF, suggesting a shift towards safer investments amid growing economic pessimism.

Street Views

• Joanne Hsu, Surveys of Consumers Director (Bearish on U.S. consumer sentiment):

  "Consumer sentiment retreated about 13% this May following three consecutive months of very little change. This 10 index-point decline is statistically significant and brings sentiment to its lowest reading in about six months." "Consumers in western states exhibited a particularly steep drop. While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions." "Year-ahead inflation expectations rose from 3.2% last month to 3.5% this month, remaining above the 2.3-3.0% range seen in the two years prior to the pandemic."