US consumer sentiment fell in May

The final reading of the University of Michigan's index of consumer sentiment fell on fears that the labor market could weaken.

Sentiment fell about 10 percent in May, ending three straight months of very little change in consumer sentiment, according to the University of Michigan Consumer Survey.

Although consumers' views about their personal finances changed little this month, their outlook for short-term business conditions fell notably in May, said UM economist Joan Hsu, director of consumer surveys.

"Strength in household incomes has been the main source of support for strong consumer spending in the past two years, so the softening of labor market expectations is worrisome, and if it continues - may lead to a retreat in consumers' willingness to spend," Hsu said. Moreover, consumers expect interest rates to remain high in the future, which will make it even more difficult for consumers to make large purchases."

Consumers expressed concern that inflation, unemployment and interest rates may move in a negative direction in the coming year. Still, sentiment remains nearly 20% above a year ago and 40% above the all-time historic low in June 2022, reflecting how much consumer sentiment has improved as inflation slows, although sentiment remains about 18% below the historical average.

There are concerns that unemployment rates may rise

Expectations about labor markets, which have remained fairly strong for most of the past year despite frequent news of layoffs and strikes, have fallen markedly this month, according to Hsu. About 38% of consumers now expect unemployment rates to rise in the coming year, compared to about 32% in the previous five months.

Furthermore, consumers expect their income growth in the coming year to slow as well. Together, at this stage consumers expect a moderate softening in the labor markets, and the coming months will reveal whether these expectations in the labor market will continue to weaken.

Consumers expect high interest rates to persist

The Fed has kept interest rates stable at a high level since last August. The share of consumers anticipating a drop in interest rates over the next year reached 37% in January 2024 – the highest reading since 2008 – but has since dropped to only 26%. This suggests that consumers expect high interest rates to continue, and indeed, concerns about interest rates were evident throughout the survey.

In recent months, a growing share of consumers have blamed high interest rates or tight credit for poor home and car buying conditions. Interest rates were less of a concern for durable goods; On the other hand, the sharp deterioration seen in the purchasing conditions of durable goods was mainly due to the high prices.

Consumer sentiment index

The consumer sentiment index fell to 69.1 in the May 2024 survey, down from 77.2 in April and up from 59.0 last May. The current index fell to 69.6, down from 79.0 in April and up from 65.1 last May. The expectations index fell to 68.8, down from 76.0 in April and above 55.1 last May.

Regarding the polls

The Consumer Survey is a rotating panel survey at the University of Michigan's Institute for Social Research. It is based on a nationally representative sample that gives every household in the US an equal probability of being selected. The interviews are conducted throughout the month by phone. The minimum monthly change required for significance at the 95% level in the sentiment index is 4.8 points; For the current index and expectations, the minimum is 6 points.