The University of Michigan’s final consumer confidence index fell on concerns the labor market may weaken.
ANN ARBOR – Consumer sentiment fell about 10% in May, breaking away from three straight months of little change in consumer views, according to a University of Michigan consumer survey.
While consumers’ views on their personal finances were little changed this month, their near-term economic outlook deteriorated significantly in May, said Joan Hsu, an economist and director of consumer surveys at the University of Michigan.
“Over the past few years, the main driver of strong consumer spending has been solid household income, so the weakening of labor market expectations is of concern and, if sustained, could lead to a decline in consumer spending,” Su said. “Furthermore, consumers expect interest rates to remain high, which will make it more difficult for them to make large purchases.”
Consumers expressed concern that inflation, unemployment and interest rates could all move unfavorably over the next year.Still, consumer sentiment is about 20% higher than a year ago and 40% higher than the all-time low in June 2022, reflecting how much consumers’ views have improved as inflation has slowed, but consumer sentiment still remains about 18% below its historical average.
Concerns emerge that unemployment may rise
Xu said expectations for the labor market, which were fairly strong for much of last year despite frequent news of layoffs and strikes, have fallen sharply this month. About 38% of consumers expect the unemployment rate to rise over the next 12 months, down from about 32% in the past five months.
Additionally, consumers also expect income growth to slow over the coming year. Overall, consumers currently expect a moderate softening in the labor market, and the coming months will reveal whether labor market expectations will continue to weaken.
Consumers expect high interest rates to continue
The Federal Reserve has kept interest rates high since August of last year. The percentage of consumers who expect interest rates to fall in the next year reached 37% in January 2024, the highest level since 2008, but has since fallen to just 26%. This suggests that consumers expect high interest rates to continue, and indeed, interest rate concerns were present throughout the survey.
In recent months, consumers have increasingly cited higher interest rates and tighter credit as reasons for the worsening buying environment for homes and cars. Interest rates have been less of a concern when it comes to durable goods; by contrast, the sharp deterioration in buying conditions for durable goods has been driven primarily by rising prices.
Consumer Confidence Index
The consumer confidence index fell to 69.1 in the May 2024 survey, down from 77.2 in April and up from 59.0 in May of last year. The current situation index fell to 69.6, down from 79.0 in April and up from 65.1 in May of last year. The expectations index fell to 68.8, down from 76.0 in April and up from 55.1 in May of last year.
About the survey
The Consumer Survey is a rotating panel survey from the University of Michigan Social Research Institute. It is based on a nationally representative sample, with each household in the continental United States having an equal chance of being selected. Interviews are conducted by telephone throughout the month. The minimum monthly change required for significance at the 95% level for the Sentiment Index is 4.8 points. For the Current Situation and Expectations Indexes, the minimum is 6 points.
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