US consumer sentiment at six-month low; inflation expectations rise By Reuters

Written by Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer confidence fell to a six-month low in May as households worried about rising costs of living and unemployment, but economists cautioned against drawing conclusions about the implications for the economic outlook.

The larger-than-expected decline in sentiment reported by the University of Michigan on Friday was across all age, income and education groups as well as political party affiliation.

“Consumer confidence is volatile month-on-month and has not been a significant driver of consumer spending in recent years,” said Michael Pearce, deputy chief US economist at Oxford Economics.

“The resilience of consumer spending depends on the strong state of household balance sheets and a strong labor market. We would not expect to see further meaningful signs of economic weakness unless the latter begins to falter.”

The University of Michigan's preliminary reading of the general index of consumer confidence came in at 67.4 this month, the lowest level since last November, compared to the final reading of 77.2 in April. Economists polled by Reuters had expected a preliminary reading of 76.0.

They estimate that the University of Michigan's continued shift to online interviews rather than phone surveys has pushed the benchmark index down about 2 points this month.

Economic growth slowed in the first quarter and employers hired the fewest workers in six months in April, recent data showed. Consumers “have expressed concerns that inflation, unemployment and interest rates may all move in an unfavorable direction next year,” said University of Michigan Consumer Surveys Director Joan Hsu.

With gasoline prices largely flat in recent weeks and stock market prices mostly trending higher, economists have been at a loss to explain the rest of the decline in sentiment.

“This is difficult to explain given that… there is little evidence of any significant downturn in the labor market,” said Paul Ashworth, head of North America. “It is also possible that households are reacting to the previous sell-off in stocks around mid-April.” Economist at Capital Economics.

“It may also be due to other non-economic factors such as the upcoming election, the short-lived conflict between Israel and Iran, or the spread of pro-Palestinian protests across campus. It may just be noise rather than a signal.”

The mood was pessimistic among Democrats, independents and Republicans.

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. US Treasury bond prices fell.

High inflation

The survey's reading of one-year inflation expectations rose to 3.5% in May from 3.2% in April, and remains above the 2.3%-3.0% range recorded in the two years before the Covid-19 pandemic.

Five-year inflation expectations increased to 3.1% from 3.0% the previous month. Although long-term inflation expectations have been within the narrow range of 2.9% to 3.1% over thirty of the past thirty-four months, they remain high compared to the range of 2.2% to 2.6% that we saw in the two years prior to the pandemic.

Inflation returned to acceleration in the first quarter, but economists believe the trend of lower inflation will reassert itself in the second quarter as domestic demand slows in response to the Fed's 525 basis point interest rate hikes since March 2022.

Next week's inflation data is expected to show consumer prices moderated in April after three straight months of strong readings. Financial markets expect the US central bank to begin a monetary easing cycle in September. But some economists are skeptical that inflation is still much higher than the Fed's 2% target.

The central bank last week left its benchmark overnight interest rate unchanged in the current range of 5.25% to 5.50%, where it has been since July.

“The Fed is unlikely to cut rates, absent the onset of a recession, unless inflation clearly heads toward 2%,” said Conrad Diquadros, chief economic advisor at Brain Capital. “Anchored inflation expectations are a key part of this assessment, and the longer-term forecast of 3.1% is near the high end of the range the Fed sees as anchored.”