US consumer sentiment fell sharply in May to its lowest level in six months, Americans reported persistently high inflation and interest rates, as well as concerns that unemployment may rise.
University of Michigan Consumer Sentiment Index, released Friday in a preview, fell to 67.4 this month from a final reading of 77.2 in April. May values are still about 14% higher than a year ago. The outlook for consumers has been generally bleak since the pandemic and especially since 2021 saw inflation rise sharply for the first time.
Consumers’ willingness to spend money is a critical driver of growth. Negative sentiment about the economy is also weighing President Joe Biden’s re-election bid.
In the first three months of this year consumer spending remained strong even as growth slowedprobably partly caused people with high incomes with significant wealth gains in their homes and stock portfolios. The unemployment rate is at a historically low 3.9%, which has forced many companies to offer higher wages to find and retain workers.
However, large retailers have begun to sense greater caution from customers, especially those with lower incomes, who are cutting back on spending.
Starbucks lowered its full-year sales and profit expectations at the end of April after a disastrous quarter in which store visits fell across the globe. Starbucks reported a steeper, faster decline in spending in the United States than expected.
McDonald’s last month said it would increase deals and value messaging to combat slowing sales. The Chicago fast-food giant said inflation-weary customers in many major markets are eating out less frequently.
Consumer price growth is stuck at elevated levels this year after falling sharply last year from a peak of 9.1% in June 2022 to 3% a year later. Prices in March increased by 3.5% compared to last year., up from 3.2% in the previous month. Federal Reserve officials stressed this month that they will likely keep its benchmark interest rate at a 23-year high for as long as it takes to bring inflation back to its 2% target.
A survey of consumer sentiment found that Americans expect inflation to remain higher next year at 3.5%. Before the pandemic, consumers typically expected inflation to be below 3% for the year ahead.
The study found that overall declines in consumer sentiment occurred across age, income and education levels.
He also crossed political lines, falling among Democrats, Republicans and Independents.