May 26 , 2023

The final  estimate of consumer sentiment for May fell 4.3 points to 59.2 after rising 1.5 points in April.  The June 2022 level of 50.0 was the lowest on record and roughly comparable to the low levels reached in the 1980 recession.

Surveys of Consumers Director Joanne Hsu said, “Consumer sentiment slid 7% amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low from last June. This decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged. This month, sentiment fell severely for consumers in the West and those with middle incomes. The year-ahead economic outlook plummeted 17% from last month. Long-run expectations plunged by 13% as well, indicating that consumers are concerned that any recession to come may cause lasting pain. That said, consumer views over their personal finances are little changed from April, with stable income expectations supporting consumer spending for the time being.

We hear the angst amongst consumers when they respond to this survey because of concern about the inflation outlook.  That fear seems warranted to some extent.  The reality is that while wages have risen 4.4% in the past year inflation has risen 4.9%.  As a result, real wages have fallen by 0.5%  So even though the consumers balance sheet is in terrific shape with debt in relation to income still very low, their purchasing power is declining.  That is not a sustainable situation and it makes people nervous.

Given that sentiment is as a very low level, consumers should be sharply cutting back on their spending.  Thus far there is little evidence of that.  Consumer spending is growing slowly but steadily.

Consumers are currently spending vigorously on services.  Goods spending had been declining for a year or so but it has begun to turn upwards.  Specifically, spending on goods has risen 1.5% in the past year.  But in the much bigger service sector spending rose by 2.7% in the past year.  Consumer spending is gradually slowing, but it is certainly not collapsing.  It should slow further in the months ahead as the Fed presses on with additional rate hikes.

The funds rate currently stands at 5,25%,     But at 5.25% the funds rate is still  highly accommodative because the core inflation rate has risen 5.5%.  Thus, the real funds rate is -0 .25%.That is not going to slow the pace of economic activity very much.  For this reason we expect the Fed to keep raising the funds rate to about the 6.0% mark by September..

Both the University of Michigan’s consumer sentiment index and the Conference Board’s measure of consumer confidence show a modest 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 1.3% GDP in 2023 as the real funds rate remains negative through midyear and as the economy continues to crank out jobs.

Consumer expectations for six months from now fell from 60.5 to 55.4.

Consumers’ assessment of current conditions declined from  68.2 to 64.9..

Stephen Slifer


Charleston, SC