Consumer sentiment tumbles in mid-May; debt ceiling crisis could make thing worse

Rising economic concerns caused consumer sentiment to take a nosedive in early May.

The University of Michigan’s index of consumer sentiment fell 9% to 57.7 in mid-May from 63.5 in April, erasing over half of the gains that occurred since the index hit an all-time historic low in June 2023. Both the current and short-term outlooks of consumers declined.

“While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff,” stated Joanne Hsu, surveys of consumers director.

The index measuring current economic conditions fell to 64.5 from 68.2 in April, while the measure of short-term expectations declined to 53.4 in May, compared with 60.5 in April. Year-ahead expectations for the economy plummeted 23% from last month.

“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,” Hsu said. “If policymakers fail to resolve the debt ceiling crisis, these dismal views over the economy will exacerbate the dire economic consequences of default.”

Year-ahead inflation expectations receded slightly to 4.5% in May after spiking to 4.6% in April. But after two years of relative stability, long-run inflation expectations rose to their highest reading since 2011, lifting from 3.0% last month to 3.2% this month.