Consumer sentiment in the U.S. has taken a dip in May, dropping to its lowest level in six months as a result of concerns over high inflation, increased interest rates, and the possibility of rising unemployment. The University of Michigan’s consumer sentiment index fell to 67.4 this month, down from 77.2 in April. Despite this decline, the current reading is still higher than it was a year ago. The ongoing gloomy outlook among consumers has been prevalent since the start of the pandemic and intensified when inflation surged in 2021, impacting overall economic growth. This negative sentiment could potentially impact President Joe Biden’s chances of reelection, given that consumer spending plays a crucial role in driving the economy. However, economists point out that consumer confidence surveys may not always accurately reflect actual spending patterns.
Economist Oren Klachkin from Nationwide Financial believes that despite the decrease in consumer sentiment, the overall economic backdrop remains strong enough to sustain consumer spending. Rising incomes are expected to offset any potential decline in consumer spending in the long run. The first quarter of this year saw strong consumer spending, particularly among upper-income earners who benefitted from significant wealth gains in their homes and stock portfolios. Additionally, the historically low unemployment rate of 3.9% has prompted many companies to offer higher wages in order to attract and retain workers, which has contributed to sustained consumer spending.
While consumer spending remained resilient in the first quarter, there are signs that lower-income consumers are becoming more cautious with their spending habits. Major retailers like Starbucks and McDonald’s have reported reduced sales and profit expectations due to a slowdown in consumer spending, especially among customers with lower incomes. Starbucks experienced a significant decline in store visits worldwide, leading to a revision of its full-year sales and profit projections. McDonald’s plans to increase promotional deals and value offerings to address the decline in sales, particularly in markets where customers are eating out less frequently due to inflation concerns.
The cost of consumer goods has been on the rise this year, with prices remaining at an elevated level after a sharp drop in 2021. In March, consumer prices increased by 3.5% compared to the previous year, up from 3.2% in the previous month. Federal Reserve officials have indicated that they will maintain the benchmark interest rate at a 23-year high for as long as necessary to bring inflation back to their 2% target. The consumer sentiment survey revealed that Americans expect inflation to remain high in the coming year, with a predicted rate of 3.5%, a significant increase from pre-pandemic expectations. The decline in consumer sentiment was observed across various demographic groups and political affiliations, indicating a broad-based concern among the population.
In response to the challenging economic environment, big retailers are adjusting their strategies to address consumer concerns and maintain sales. Starbucks and McDonald’s are among the companies that have adapted their approaches to cater to changing consumer preferences and behaviors. Despite the decline in consumer sentiment, economists remain optimistic about the overall economic outlook, citing strong fundamentals such as rising incomes and low unemployment rates as factors that could support sustained consumer spending. While uncertainty remains due to factors like inflation and interest rates, there is a belief that the economy will continue to recover, albeit with some adjustments in consumer behavior and spending patterns.
