US Consumer Sentiment Shows Biggest Drop in Nearly Three Years

Consumer sentiment fell sharply in May, bringing the Michigan Consumer Sentiment Index to its lowest level in six months.

The closely watched index dropped nearly 10 points from the last reading in April to 67.4, the lowest since November. The drop comes after the survey of consumer optimism had moved within a three-point range over the previous four months.

It’s the largest decline in the index in about three years, and fell far short of the 76.0 reading that economists surveyed by the Wall Street Journal and Dow Jones Newswires expected.

“While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead,” said survey director Joanne Hsu. 

The survey showed similar declines when consumers were asked about their current economic conditions and on their expectations of future business conditions. 

Inflation Fears Worsen 

Consumers said they see inflation getting worse over the next year, anticipating an inflation rate of 3.5%, up from 3.2% in last month’s survey and above the average range seen prior to the pandemic. The survey also showed that consumers’ long-range inflation expectations of five years ahead ticked higher, remaining well above the pre-pandemic range.  The worsening sentiment on price pressures come as inflation readings have continued to move higher in 2024. 

Consumer inflation expectations are an important gauge for Federal Reserve officials, who closely watch survey results for indications if consumer behavior will lead to higher prices. Fed officials have said repeatedly that the central bank won’t be in a position to consider cuts to the benchmark interest rate until inflation is under control.

Sentiment Could Affect Spending

Jeffrey Roach, chief economist at LPL Financial,  said that uncertainty about inflation could affect consumer spending levels, which are a significant contributor to U.S. economic growth. The most recent retail sales report showed that consumers continued to surprise with their spending levels, though some interest-rate-sensitive categories moved lower, including automobiles and furniture. 

“Most consumers have pivoted away from big-ticket buying plans, confirming what we saw from the Conference Board earlier this month” Roach said. “As of this month, most consumers believe now is a poor time to buy a vehicle or a home. These changes in buying plans could have knock-on effects in other categories of spending.”