Consumer sentiment unexpectedly plunged in May as worries over the direction of the economy worsened and household expectations for inflation over the long run rose.
The University of Michigan’s index of consumer sentiment fell to 57.7, 9.1 percent below the April score of 63.5, according to the preliminary May survey of consumers. Economists had expected the index to fall by just half a percentage point to 63.
The index of consumer expectations crashed 11.7 percent to 53.4, down from 60.5 in the final April reading. In index of current economic conditions fell to 64.5 from 68.2 at the end of April.
The sudden downturn was not expected. Year ahead expectations plummeted 23 percent from last month and long-run expectations fell 16 percent. This is an indication that consumers are worried that a looming economic downturn will not be brief, according to the director of the survey Joanne Hsu.
“While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff,” Hsu said. ‘If policymakers fail to resolve the debt ceiling crisis, these dismal views over the economy will exacerbate the dire economic consequences of default.”
The labor market is still viewed as strong, according to Hsu. But the anticipation of a recession will lead consumers to pull back if it begins to weaken, Hsu said.
Expectations for inflation in the year-ahead ticked down to 4.5 percent from 4.6 percent in April. But the long-run expectations for inflation, which are closely watched by the Federal Reserve, rose to 3.2 percent, the highest reading since 2011. This marked a move above the range of 2.9 to three percent that has held for the past two years. It suggests that consumers are increasingly worried that inflation could get stuck at a high level.