Consumer sentiment fell to its lowest level in six months in May as Americans turned sour on inflation, interest rates and the labor market.
The preliminary reading of the University of Michigan’s consumer sentiment index came in at 67.4, a 14% drop from a year ago. That compares to 77.2 in April and forecasts for a slight dip.
“This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups,” said Joanne Hsu, survey director.
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“While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions,” Hsu said. “They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.”
Over the past few months, consumer sentiment had largely held steady with slight increases and decreases occurring as inflation readings have come in a little higher than expected and hopes for interest rate cuts from the Federal Reserve have been pushed back to later in the year.
Inflation expectations, meanwhile, worsened with consumers expecting prices to be 3.5% higher, up from 3.2% a month ago.
The government will report the consumer price index for April on Wednesday with expectations it will show inflation is still running considerably above the Fed’s 2% annual target, though it may dip slightly from April’s 3.5% level. Core inflation that omits often volatile food and energy costs likely moderated a little last month, according to economists at Nomura Securities.
“Transportation service prices are a key driver: auto insurance and motor vehicle maintenance price increases moderated notably in April after rising sharply in March,” Nomura said. “Airline fares likely declined in April, as its seasonal adjustment is a significant headwind.”
There will also be the April retail sales report from the Census Bureau on the same day, a measure that will show whether the consumer is continuing to spend as has been the case in recent months.
Markets rallied this week as some economic data came in a little weaker than forecast and following the statement earlier this month from Federal Reserve Chairman Jerome Powell that future rate hikes were “unlikely.”
Meanwhile, the latest data on the labor market shows that it moderated somewhat in April to a more normal level of demand that had been seen in recent months. Slowing wage growth also boosted optimism that the economy was not on the verge of a wage and price spiral.
BCA Research said in a client note Friday that increased supply of labor, mostly from increases in immigration, is allowing the job market to rebalance from the disruptions caused by the COVID-19 pandemic.
“Hence, a recovery in labor market participation causes labor demand to stay unchanged, while labor supply grows,” BCA said. “This rebalances demand and supply, while fueling growth in the inverted supply-driven economy. Thereby, a recovery in labor market participation is a ‘benign’ rebalancing and disinflation.”
