Consumers are experiencing conflicting feelings about the economy as differing reports come in from The Conference Board and University of Michigan, with a more positive assessment of the current business climate clashing with renewed worries about inflation.

Consumers’ confidence reversed course and saw an increase in May after three months of decreases, according to the latest data from The Conference Board. Confidence rose from 97.5 in April to 102, following a drop in February, a small decrease in March and a large drop in April.

“Confidence improved in May after three consecutive months of decline,” said Dana M. Peterson, chief economist at The Conference Board. “The overall confidence gauge remained within the relatively narrow range it has been hovering in for more than two years.”

While a definite improvement, May’s reading is still below the two-year high seen in January. Peterson stated that this is due to consumers remaining anxious about the economy.

Illustrating that underlying anxiety, the University of Michigan reported that consumer sentiment dropped 10.5% in May, following a 0.5% decrease in March and a 1.9% fall in April. May’s consumer sentiment reading came in at 69.1, down 8.1 points from April and the lowest reading in five months, but remained up 17.1% year-over-year. 

“This 8.1 index-point decrease is statistically significant and brings sentiment to its lowest reading in about five months,” said Joanne Hsu, director of the Surveys of Consumers. “Still, sentiment remains almost 20% above a year ago and about 40% above the all-time historic low in June 2022, reflecting how much consumer views have improved as inflation eased.”

Consumer confidence data: 

“Consumers’ assessment of current business conditions was slightly less positive than last month,” stated Peterson. “However, the strong labor market continued to bolster consumers’ overall assessment of the present situation. Views of current labor market conditions improved in May, as fewer respondents said jobs were ‘hard to get,’ which outweighed a slight decline in the number who said jobs were ‘plentiful.’”

• The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—rose from 140.6 to 143.1. 
• For current business conditions, 20.3% of consumers said they were “good,” down from 20.8% last month. Meanwhile, 17.6% said business conditions were “bad,” unchanged from last month. 
• For the labor market, 37.5% of consumers said jobs were “plentiful” (down from 38.4%), while 13.5% of consumers said jobs were “hard to get” (down from 15.5%).
• The Expectations Index—based on consumers’ short-term outlook for income, business and labor market conditions—rose from 68.8 to 74.6 (1985 = 100).
• As for consumers’ short-term business conditions outlook, 16.8% expect conditions to worsen (down from 19.1%). 
• For the labor market outlook, 12.6% of consumers expect more jobs to be available (up from 12.3%), and 18.2% anticipate fewer jobs (down from 19.8%). 
• For short-term income prospects, 11% expect a decrease in income (down from 14%).

Peterson concluded, “Notably, average 12-month inflation expectations ticked up from 5.3% to 5.4%. Perhaps as a consequence, the share of consumers expecting higher interest rates over the year ahead also rose, from 55.2% to 56.2%. Looking ahead, fewer consumers expected deterioration in future business conditions, job availability, and income, resulting in an increase in the Expectation Index.”

Consumer sentiment data: 

“The year-ahead outlook for business conditions saw a particularly notable decline, while views about personal finances were little changed. Consumers expressed particular concern over labor markets; they expect unemployment rates to rise and income growth to slow,” explained Hsu. “The prospect of continued high interest rates also weighed down consumer views. These deteriorating expectations suggest that multiple factors pose downside risk for consumer spending.”

• Inflation expectations for the future, meaning the year ahead, rose slightly from 3.2% to 3.3% this month, staying above the 2.3% – 3% range seen in the two years prior to the pandemic. 
• Long-run inflation expectations remained at 3% for the second month, coming in just below the 2.9% – 3.1% range seen for 30 of the last 34 months. 
• Long-run inflation expectations remained elevated relative to the 2.2 – 2.6% range seen in the two years pre-pandemic.

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