Inflation risks and increased buying conditions may increase.

Final May results from the University of Michigan Survey of Consumers show that overall consumer sentiment continued towards the end of May. Composite consumer sentiment fell to 58.4 in May, 59.1 in mid-May and 65.2 in April. Final May results fell 6.8 points, or 10.4 percent. The index is now down 42.6 points from the February 2020 results and the lowest level since August 2011 (see first chart).

Both components post the index fall. The Current-Economic-Situation Index fell to 69.4 from 63.4 in April (see first chart). This leaves the index with a 6.1-point or 10.0 percent decline for the month and a 51.5-point drop from February 2020 and keeps the index at its lowest level since March 2009.

The second sub-index – Consumer Expectations, one of the main indicators of AIER – lost 7.3 points or 11.7 percent per month, falling to 55.2 (see first chart). The index has been below 36.9 points since February 2020 and the second-lowest level since November 2011.

All three indicators are near or below the lows seen in the last four of the last six recessions.

According to the report, “The recent drop was mainly driven by concerns about inflation, the current buying conditions for homes and durable goods, as well as the persistent negative outlook on consumers’ future outlook for the economy.” However, the report adds, “At the same time, consumers are less frustrated with the prospects for their personal finances than with future business conditions. Less than a quarter of customers are expected to be financially weak a year from now. ” Furthermore, the report states, “Looking at the long term, most consumers expected their financial situation to improve over the next five years; This stock remains essentially unchanged during 2022. Take-away from the report, “A stable outlook for personal money may support consumer spending at present. Nevertheless, the persistently negative outlook for the economy may predominate personal factors influencing future consumer behavior.”

One-year inflation expectations fell slightly to 5.3 percent in May, from 5.4 percent in April. One-year expectations have risen several times over 3.5 percent since 2005 only to fall behind (see second chart). Five-year inflation expectations remain unchanged at 3.0 percent in May. This result is better in the 25-year range from 2.2 percent to 3.5 percent (see second chart).

The weak trend in consumer sentiment reflects the combination of events with inflation that led to the pack. Constantly high price increases affect consumer and business decision making and distort economic activity. Overall, economic risks remain high due to the effects of inflation, the beginning of the Fed tightening cycle, the Russian aggression in Ukraine, and renewed lockdowns in China. Ramping up negative political advertising during midterm elections could also affect consumer sentiment in the coming months. The overall economic outlook remains highly uncertain.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 for over 25 years researching economic and financial markets on Wall Street. Bob was previously head of Brown Brothers Harriman’s Global Equity Strategy, where he developed an equity investment strategy that combines top-down macro analysis with bottom-up fundamentals.

Prior to BBH, Bob was a senior equity strategist at State Street Global Markets, a senior economic strategist at Prudential Equity Group, and a senior economist at Citicorp Investment Services and a financial markets analyst. Bob holds an MA in Economics from Fordham University and a BS in Business from Lehigh University.

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