Consumer Sentiment Fell to 44.8 in May. Why Wall Street Cares About How People Feel

The Current Economic Conditions index dropped to 45.8, while the measure of Consumer Expectations fell to 44.1.

Behind those numbers was a much more familiar problem. People felt that everyday life had become too expensive.

The University of Michigan reported that 57 percent of surveyed consumers spontaneously mentioned high prices as damaging their personal finances, up from 50 percent one month earlier. Researchers also pointed to gasoline prices and ongoing supply disruptions connected with the Strait of Hormuz as major sources of concern.

A survey about people's feelings may seem less important than an inflation report measuring actual prices. Financial markets pay attention to both because expectations can eventually influence behavior.

What is the Consumer Sentiment Index?

The University of Michigan Surveys of Consumers has tracked household attitudes for decades.

Participants are asked about their current finances and expectations for the economy, among other questions.

Their answers are combined into indexes designed to measure how confident consumers feel about present conditions and the future.

The May headline index of 44.8 was dramatically below levels seen only two years earlier. In May 2024, the same index stood at 69.1.

That decline does not mean household income fell by the same percentage.

A sentiment index measures attitudes. That distinction is crucial.

Why measure feelings at all?

Consumer spending represents a large portion of U.S. economic activity.

Before someone buys a car or books an expensive vacation, their decision may depend partly on how secure they feel about their finances.

A household that expects income to rise may be willing to spend more today. Someone who fears layoffs or believes inflation will continue eroding their purchasing power may postpone large purchases and increase precautionary savings.

This means confidence can influence future economic activity.

It is one reason economists describe some surveys as soft data.

Hard data measure activity that has already happened, such as payroll employment or retail spending. Soft data attempt to capture expectations or perceptions. Neither should be read alone.

May showed how inflation can affect people psychologically

By May, high gasoline prices had become a particularly visible reminder of inflation.

Gas prices are unusual because consumers encounter them repeatedly on large signs beside roads.

Most people do not know today's price of copper or the current cost of shipping a container across the Pacific. They can tell immediately when gasoline increases by 40 cents per gallon.

That visibility can make energy prices disproportionately important to perceptions of the economy.

In early May, roughly one-third of consumers spontaneously mentioned gasoline prices when discussing economic concerns, according to preliminary University of Michigan results.

The final survey later showed broader frustration with the cost of living.

Economic statistics measure changes in average prices. Consumers experience those changes through individual budgets.

A household that drives two long commutes each day may feel an oil shock much more severely than someone who works remotely and rarely drives.

Inflation expectations also moved higher

The final May survey produced another number watched carefully by economists.

Consumers expected inflation of about 4.8 percent over the next year, according to Reuters. Expectations for inflation over the longer term rose to 3.9 percent from 3.5 percent in April.

Why does it matter what consumers think inflation will be? Because expectations can influence decisions today.

Imagine workers expect prices to rise rapidly for several years. They may seek larger pay increases. Businesses expecting their own costs to climb may increase prices sooner. Consumers worried that a product will become more expensive may purchase it earlier.

When enough people change behavior around the same expectation, inflation psychology can begin influencing actual economic activity.

This is why central banks pay close attention to whether long-term inflation expectations remain anchored.

Expectations are powerful, although they are imperfect

Consumers cannot forecast inflation with precision. Neither can professional economists.

Survey expectations can move sharply in response to news or particularly visible prices.

A spike in gasoline can make inflation feel more severe even if prices elsewhere are relatively stable.

This does not make the survey useless. Instead, it means researchers interpret changes alongside other information.

If inflation expectations rise at the same time that actual inflation accelerates and businesses report higher costs, the combination may deserve more attention than any one indicator alone.

Why markets might react

Suppose consumer sentiment falls because households believe their finances are deteriorating.

Investors may begin considering whether discretionary spending will weaken.

That matters to retailers. It matters to restaurants and travel companies. Banks may care if financially stressed borrowers become more likely to miss payments.

At the same time, higher inflation expectations could cause investors to believe the Federal Reserve will keep interest rates elevated.

That can affect bond yields and stock valuations.

One survey can therefore contain information relevant to several parts of the financial system.

The market reaction still depends on whether the result was already expected. Markets generally respond most strongly to surprises.

Low sentiment does not guarantee a recession

Consumers can feel extremely pessimistic while continuing to spend.

People may complain about prices and still buy necessities.

Higher-income households with large savings may maintain spending even when surveys show widespread frustration.

The May sentiment reading therefore did not prove that a recession was beginning. It revealed that household confidence had deteriorated substantially.

A useful indicator provides evidence. It does not provide certainty.

Sentiment can be especially important for businesses

Companies use consumer behavior to make decisions about inventory, hiring, and expansion.

A retailer expecting weak demand might order fewer products. A restaurant chain might delay opening new locations. An automaker may offer more financing incentives when buyers become cautious.

If enough businesses respond defensively to weaker expected demand, those decisions can influence actual economic growth.

Expectations can become economically important even before consumers change behavior dramatically. This feedback loop is part of what makes sentiment data worth monitoring.

What May's 44.8 reading really said

The most important message from the May survey was not that the economy could be reduced to a score of 44.8.

It was that household perceptions had weakened significantly as rising prices affected personal finances.

Those perceptions were increasingly tied to expectations about future inflation.

For someone learning finance, consumer sentiment offers a useful reminder that markets are shaped by human behavior.

People make decisions based on their income and the prices they see. They also respond to what they believe comes next.

Economics therefore requires measuring both reality and expectations.

The May 22 report gave investors an unusually clear view of the second one.