May 10, 2024

The preliminary estimate of consumer sentiment for May plunged by 9.8 points to 67.4 as consumers worried that inflation might remain higher than expected for a protracted period, and that the Fed might not cut rates at any point in 2024.

Surveys of Consumers Director Joanne Hsu said, “Consumer sentiment retreated about 13% this May following three consecutive months of very little change. This 10 index-point decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups. Consumers in western states exhibited a particularly steep drop. While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.”

Many consumers have been concerned by the fact that while their nominal earnings were rising, inflation was eroding their purchasing power and, as a result, wages in real terms declined for roughly two years.  It has begun to rise in recent months, but consumer real income remains far below what it was prior to the recession.

In addition, many consumer prices have risen sharply since the recession.  The Fed promised that the increase in prices would prove to be “temporary”.  That has not been the case.  This is particularly problematic because so many of those price gains are on necessary commodities like food, shelter, and transportation which hit lower income families the hardest.

Given that sentiment has been low for a long time, one might have expected to see consumers cut back sharply on their spending.  There is no evidence of that.  Consumer spending continues to grow steadily.  We’ll see if this latest drop in sentiment has any impact.

The inflation rate should continue to slide as the year progresses and should allow the Fed to ease at some point close to yearend.  We expect the funds rate to fall to 5.25% by the end of the year and continue falling to 3.5% in 2025..

Both the University of Michigan’s consumer sentiment index and the Conference Board’s measure of consumer confidence both show a moderate rebound in the past couple of months.  The two series can diverge from one month to the next, but the trends are similar.

We expect GDP growth of  3.0%  in the second quarter as the economy continues to crank out jobs and wages rise.

Consumers’ assessment of current conditions fell 10.2 points from 79.0 to 68.8.

Consumer expectations for six months from now fell 9.5 points from 76.0 to 66.5..

Stephen Slifer


Charleston, SC