U.S. consumer sentiment weakened sharply in May, with the University of Michigan’s index dropping to its lowest level since June 2022. The decline reflects mounting concerns over rising living costs, lingering trade tensions, and growing doubts about the economic outlook. As households brace for further price increases and tighter financial conditions, retailers, auto makers, and homebuilders report caution, suggesting that consumer spending may be set for a notable pullback in the months ahead.

The University of Michigan’s preliminary sentiment gauge slid to 50.8 in mid‑May, down from 52.2 in April. Analysts note that this is the first time sentiment has fallen below 51 in nearly a year, underscoring the unease among American households. Notably, one‑year inflation expectations among survey respondents surged to 7.3 percent—levels not seen since the early 1980s—signaling that many consumers anticipate steep price increases over the next 12 months.

Rising Prices Bite Into Household Budgets

At the heart of the slump in sentiment is persistent inflation, which has remained stubbornly high despite moderate price gains reported in April. Recent data from the Labor Department showed that import prices for consumer goods climbed by 0.3 percent in April, even excluding motor vehicles, while overall import prices ticked up 0.1 percent. Those increases have translated into noticeable price hikes at the gas pump, grocery store, and in the price tags on electronics—areas where consumers spend the bulk of their incomes.

Retail giants such as Walmart have already warned that tariffs on imported goods will force price increases later this month. Auto manufacturers, too, have announced incremental price hikes on select models, driven by elevated costs for steel, plastics, and semiconductor chips. “Consumers are starting to feel sticker shock on everyday items—groceries, home appliances, even their next car purchase,” said Michael Sanders, a veteran retail analyst. “When the people who buy your products start cutting back, you know sentiment is in trouble.”

Food and energy costs remain a particular sore spot. While headline inflation has slowed slightly from its pandemic‑era highs, core inflation—excluding food and energy—has continued to hover above 5 percent for several consecutive months. Grocery items such as meat, dairy, and fresh produce have seen year‑over‑year price jumps in the high single digits, according to private‑sector tracking. Although energy prices eased modestly in April after surging earlier this year, gas still costs an average of $3.70 per gallon, up roughly 15 percent from a year ago. For many households already contending with stretched budgets, even small upticks in everyday costs can feel overwhelming.

Trade Tensions Fuel Uncertainty and Scarcity Fears

Beyond general inflation, trade policy uncertainty has emerged as a fresh trigger for consumer anxiety. Nearly three‑quarters of survey respondents mentioned tariffs when describing their worries about the economy—up from just over 60 percent in April. The Trump administration’s decision to impose steep duties on a wide range of imports, and recent retaliatory levies from trading partners, have created palpable uncertainty about future availability and pricing of imported goods.

In mid‑May, U.S. and Chinese negotiators agreed to a temporary, 90‑day tariff truce, pausing planned increases on Chinese electronics and other exports. However, many consumers remain skeptical that a short‑term reprieve will translate into lasting price relief. Reports of port slowdowns and potential shortages of popular items—from toys and smartphones to kitchen appliances—have fed into a widespread fear that essentials may become harder to find.

“Even if tariffs are temporarily dialed back, the memory of empty shelves and out‑of‑stock signage is still fresh in consumers’ minds,” observed Laura Kim, a supply chain economist. “People are worried not just about price tags but about whether staple goods will be available when they walk into the store.” That worry, she added, can depress spending even before shortages materialize, as households build precautionary savings buffers and delay discretionary purchases.

Monetary Tightening Adds to Consumer Strain

Compounding the inflation and trade anxieties is the Federal Reserve’s monetary tightening campaign. Following a year of rapid rate increases, policymakers left the federal funds rate in the 4.25 percent to 4.5 percent range earlier this month, while signaling a willingness to raise rates again if inflation remains elevated. With consumer price pressures showing no sign of abating, many market watchers believe the Fed will resume hikes by mid‑summer.

Higher borrowing costs have already begun to pinch household budgets. Mortgage rates, which climbed above 7 percent in April, have prompted a noticeable slowdown in homebuying. Housing starts for single‑family homes fell to a nine‑month low in April, slipping 2.1 percent to a seasonally adjusted annual rate of 927,000 units. Building permits for future single‑family construction also declined 5.1 percent, suggesting weakness could persist into the summer.

The housing sector is one of the largest drivers of household wealth, and when mortgage rates spike, prospective buyers often retreat. “We’re seeing would‑be homeowners put plans on hold, and current homeowners become hesitant to move or refinance,” said Ben Ayers, a senior economist at a major financial firm. Homebuilder sentiment, as tracked by the National Association of Home Builders, plunged to a one‑and‑a‑half‑year low in May, with over three‑quarters of builders citing “difficulty in pricing homes” due to the unpredictability of material costs—a direct knock‑on effect of both tariffs and higher financing costs.

Auto loans, credit cards, and personal lines of credit have also become more expensive. According to industry data, the average interest rate on a new‑car loan jumped to 6.3 percent in April, the highest level in a decade. Simultaneously, credit card interest rates have climbed above 20 percent, pushing more consumers to carry balances and raising fears of escalating delinquency rates. As household debt service ratios rise, some consumers report that they are skipping non‑essential medical procedures or delaying durable‑goods purchases like new furniture and appliances.

Widening Rifts Between Political Affiliations

The slump in sentiment was particularly pronounced among Republican households, marking the first time since the 2020 presidential election that sentiment fell for the GOP base. In mid‑May, the average sentiment score among Republicans dipped to 84.2—a 7 percent decline from April—while independents saw a modest uptick and Democrats remained largely unchanged. This fracture is notable because Republican consumers have traditionally ranked among the most optimistic segments, attributing robust job markets and tax cuts to their favorable outlooks.

Political analysts suggest that the sharp decline among Republicans reflects frustration with the current administration’s trade and economic policies. “People who once cheered on an America‑first stance are now questioning whether the trade skirmishes are worth the immediate harm to their pocketbooks,” said Daniel Freeman, a political economist. “When base supporters begin signaling doubt, you know the policy had a broader negative effect than anticipated.”

Job Market Strength Fails to Fully Offset Concerns

Despite the gloom in sentiment surveys, the labor market remains relatively strong. The unemployment rate held steady at 3.4 percent in April, near its lowest level in over 50 years. Employers continue to add jobs at a healthy clip—March payrolls rose by 180,000 positions, and April saw an additional 253,000 hires. Wage growth, however, is starting to cool: average hourly earnings increased by 4.4 percent over the past year in April, down from a peak near 6 percent in mid‑2022.

The disconnect between a still‑tight labor market and waning consumer confidence highlights the unease consumers feel about the future. “Workers know they can still find jobs, but the question is—at what wages and with what purchasing power?” noted Amy Donovan, a labor market specialist. “If inflation outpaces wage gains, that sense of vulnerability persists, and sentiment will remain under pressure.”

Beyond households’ immediate concerns about prices, a range of broader economic uncertainties weigh on sentiment. Geopolitical tensions—stemming from the war in Ukraine, growing friction in the Middle East, and the prospect of global supply chain disruptions—fuel fears of renewed commodity price spikes. Meanwhile, investors have grown jittery over signs of slowing economic growth at home and abroad; recent GDP data showed that the U.S. economy contracted in the first quarter, its first quarterly decline in three years.

Stock market volatility has also played a role. After a strong start to 2024, equity benchmarks have diverged, with technology stocks pulling back and more cyclical sectors struggling amid rising rates. A volatile stock market can erode household wealth and dampen confidence, particularly for older consumers who rely on investment income. Even with retirement accounts largely insulated for now, the specter of market swings adds another layer of caution for consumers weighing major financial commitments.

On the small‑business front, entrepreneurs increasingly cite inflation and interest rates as their top challenges. A recent National Federation of Independent Business survey found that nearly 25 percent of small business owners said inflation was their biggest concern, up from 15 percent a year ago. With small businesses representing a significant share of local employment and consumer confidence, their struggles can feed back into the broader sentiment environment.

Will Consumers Retract or Hold Steady?

As consumers enter the summer months, the key question is whether spending will hold up despite these headwinds. Economists caution that if sentiment remains depressed, it could translate into softer retail sales, slower vehicle purchases, and tepid demand for home improvement projects—all critical drivers of GDP. Early data for April showed retail sales essentially flat after adjusting for inflation, reinforcing the notion that consumers may already be pulling back.

Some households are hoping for a reprieve if energy and housing inflation cool later in 2025. The Federal Reserve, for its part, has reiterated that it monitors consumer expectations closely; prolonged high inflation expectations, combined with wage pressures, could force the central bank to tighten policy further than anticipated. “If consumers believe the Fed is behind the curve, their spending behavior will reflect that fear,” said Joseph Reynolds, a senior economist at a Wall Street research firm.

Yet there are glimmers of resilience. High‑income households, less burdened by everyday costs, continue to report relatively stable sentiment levels. And pockets of optimism remain in regions less exposed to housing inflation—particularly the Southeast and Mountain West states. Some analysts believe that if energy prices ease over the summer and trade tensions de‑escalate, sentiment could rebound modestly by the fall.

For now, however, the sharp decline in May’s sentiment reading underscores the vulnerability of American consumers to a confluence of shocks: sustained inflation, persistent trade uncertainty, higher borrowing costs, and global economic anxieties. As prices continue to outpace income gains and uncertainty lingers, households appear increasingly inclined to brace for the worst—shaping an economic landscape in which cautious consumer spending may dampen growth prospects well into the second half of 2025. 

(Adapted from MarketScreener.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal