As the Iran conflict rages on unabated, now into its 70th day, consumer morale in the U.S. eroded further, according to the University of Michigan’s May consumer preliminary consumer sentiment survey results published Friday.
Consumer Morale Dips Yet Again
The headline consumer sentiment index fell by 1.6 index points to 48.2 from the final April reading of 49.8. This matched the trough reached in June 2022. A reading below 50 suggests waning confidence among consumers. Economists had expected an almost unchanged reading of 49.7.
The negativity was largely in the current economic conditions index, which slipped to 47.8 from 52.5. This deterioration in the current economic conditions was due to a surge in concerns about high prices both for personal finances as well as buying conditions for major purchases.
Real income expectations continued to decline, and have been trending lower since March. About one-third of consumers mentioned gasoline prices and about 30% mentioned tariffs. “Taken together, consumers continue to feel buffeted by cost pressures, led by soaring prices at the pump,” UMich said. “Middle East developments are unlikely to meaningfully boost sentiment until supply disruptions have been fully resolved and energy prices fall.”
On the other hand, the expectations index, incidentally edged up by 0.4 points to 48.5.
Inflation Expectations High but Eases
Inflation expectations, however, eased slightly. Year-ahead inflation expectations eased slightly to 4.5% in May from 4.7% in April, but were substantially higher than the 3.4% rate seen before the start of the U.S.-Iran war.
The long-run inflation expectations inched down to 3.4% in May from 3.5% in April, remaining higher than the 2024 range of 2.8%-3.2% and the 2019-2020’s sub-2.8% levels.
Economic Momentum Intact
The monthly jobs report released Friday morning showed robust job gains of 115,000, much higher than the expected 61,000. The inflation component of the report, namely the average hourly earnings rose by 3.6% compared to the consensus of 3.4%.
Commenting on the jobs data, Northlight Asset Management Chief Investment Officer Chris Zaccarelli said, “The economy is so much better than what the doom crew has been saying.” Despite headwinds such as the higher oil prices, sticky inflation and higher-for-longer interest rates, the labor market added jobs, GDP was growing and corporate profits were expanding at a rapid pace, he added.
Discussing the April jobs data, Fifth Third Commercial Bank Chief Economist Bill Adams said job growth has improved since the turn of the year. He, however, noted that the labor force contracted and the participation rate fell to its lowest since 2021. The economist sees labor shortage as the next challenge in the eventuality of the U.S. economy avoiding downside risks from the Iran war.
“The Fed will see the April jobs report as another argument against a rate cut,” Adams said.
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