Who Pays for the Shocks
U.S. consumer sentiment has fallen to new lows in May as Americans remain pessimistic about the economy amid inflation, war and tariffs, with economists saying households may not feel financially better off for some time. The University of Michigan Surveys of Consumers hit all-time lows in May in a preliminary reading released last week, one of several consumer opinion surveys showing Americans have not regained confidence in the U.S. economy since the Covid pandemic struck more than six years ago.
The people at the bottom are still carrying the cost of decisions made far above them. Economists told CNBC that consumers remain scarred by years of rapid price increases even as the annual inflation rate cools. Americans are also worn out by a series of economic disruptions, including Covid, wars and President Donald Trump's tariffs. Yelena Shulyatyeva, senior economist at the Conference Board, said, "It's a series of shocks," and added, "Consumers don't get a break."
Prices Stay High, Confidence Stays Low
Economists and monetary policymakers typically track inflation over a 12-month time frame, and by that measure price growth is closer to the Federal Reserve's target of 2% than to the four-decade highs seen during the pandemic. But shoppers have focused on the cumulative change in prices over the past several years. Cleveland Fed President Beth Hammack told CNBC that from that vantage point, there's been about a decade's worth of inflation in half the time. Kyla Scanlon, an economic commentator known for coining the term "vibecession," said, "People are starting to hear that inflation is going down, but their box of cereal is still really expensive," and added, "That feels really, really bad."
High prices have caused most of the decline in consumer sentiment between 2019 and 2026, according to a data analysis from PNC Financial Services. The bank's analysis said sticker shock also explains why a model of economic conditions stopped moving in line with consumer sentiment over recent years. Consumers are thinking more about the role of inflation in their lives, and the share of respondents to Michigan's survey who said they heard negative news about price growth or blamed that for their sour outlooks spiked after the pandemic began in 2020. Google searches for the term "inflation" hit all-time highs earlier this year. Brian LeBlanc, PNC's senior economist, said, "No one cared about inflation until it became a problem," and added, "Now, it's something that everybody in the country is thinking about."
The Recovery Keeps Getting Interrupted
Economists also said confidence has not rebounded because consumers do not have enough time to recover from one economic jolt before another appears. Eric Winograd, an alumnus of the New York Federal Reserve Bank who is now the chief economist at asset manager AllianceBernstein, said, "I can't think of a period where you've had shocks like these," and added, "I'm not saying that these are the biggest in magnitude, but to have this many sequential events is extremely unusual." Georgetown University finance professor Francesco D'Acunto said U.S. consumers would need to see "positive" and "stable" economic conditions for several quarters for sentiment to recover, but instead they have been getting "the opposite" as geopolitical conflicts break out and as Trump continues his push for higher tariffs on trade partners. Joanne Hsu, the director of Michigan's survey, said, "Consumer sentiment isn't the only thing that really breaks around the pandemic."
Despite what they tell pollsters, consumers have continued to spend. Uber and Walt Disney last week reported strong customer spending, defying fears that shoppers would tighten their purse strings in response to price increases. Gregory Daco, chief economist at consulting firm EY-Parthenon, said, "The traditional correlation between sentiment and spending has largely broken down," and added, "We have to depart a little bit from the traditional analysis of these gauges because of the unique circumstances that we're currently living through."
AllianceBernstein's Winograd said investors looking for a pulse check on consumers should monitor the direction of confidence indexes rather than pre-pandemic comparisons. He said consumer opinion is still a low-tier economic data point for traders making investment decisions. The S&P 500 reached an all-time high on the same day last week that Michigan released its record-low consumer sentiment reading. The benchmark stock index has more than doubled, surging roughly 130%, since the start of 2020, while Michigan's sentiment gauge has been cut in half, tumbling 52%.
What the Markets Celebrate
In the near term, sentiment is unlikely to improve as oil prices stay above $100 a barrel in the wake of the Iran war, several economists told CNBC. The national average price for a gallon of gasoline soared past $4, the level at which a 2022 AAA survey found that a majority of Americans implement lifestyle changes. Gasbuddy said its daily active user base nearly doubled in March as the war ramped up. Whirlpool said last week that it experienced a "recession-level" decline in appliance demand due to cratering consumer confidence owing to the Middle East conflict. McDonald's CEO Chris Kempczinski warned analysts that customer spending could take a hit as rising gas prices pressure pocketbooks.
What happens next in the job market can also dictate consumers' feelings and behavior, Winograd said. Federal government data released last week showed the U.S. job market expanded more than economists expected in April, while still pointing to a "low-hire, low-fire" environment. Even with these uncertainties and their gloomy views, American consumers, responsible for roughly two-thirds of all economic activity, are unlikely to crack, Winograd said. "It's a foolish man who bets against the U.S. consumer," he said. "The base case has to be that the consumer continues to plug along."