CONSUMER SENTIMENT KEY POINTS:
- May consumer sentiment falls to 59.1, its lowest level since August 2011
- Soaring consumer prices undermines confidence in the U.S. economy
- S&P 500 extends gains despite disappointing sentiment data, but the move is likely technical rather than related to University of Michigan survey
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After a short-lived rebound in April, a popular gauge of U.S. consumer sentiment worsened sharply in early May, reaching its lowest level since August 2011, undermined by mounting inflationary pressures. In recent months, inflation, running at the fastest pace in four decades, has been the main source of consternation for most Americans, who have seen their personal finances deteriorate as the rising cost of living had cut into real incomes, stretching household budgets thin.
According to preliminary results from the University of Michigan, its May consumer sentiment index fell to 59.1 at mid-month from 65.7 in April. The median forecast of economists in a Bloomberg News poll called for a more modest decline to 63.
Digging deeper into the survey results, the current economic conditions indicator registered its worst reading since 2013, plunging to 63.6 from 69.4 on worries that wages will not keep up with inflation. Meanwhile, the expectations index fell to 56.3 from 62.5 despite the strong labor market. When it comes to inflation expectations, the one-year gauge remained at 5.4%, while the five-year outlook stayed anchored at 3%, a sign that American still believe that the Fed will manage to control inflation in the long run.
Source: University of Michigan
The depressed sentiment is cause for concern considering that household consumption accounts for approximately 70% of U.S. GDP. While recent data has shown that Americans do not always act as they feel, it remains important to monitor consumer mood, as any pullback in spending as a result of falling confidence can spell trouble for the economic outlook and raise fears that the economy is headed for a hard landing amid steadily rising interest rates.
The worse-than-expected University of Michigan sentiment survey failed to trigger a negative reaction in risk assets. In fact, the S&P 500 was able to extend gains after the data crossed the wires, but the move is more of a technical bounce after the equity index has reached extremely oversold levels in recent days. Looking ahead, with economic data consistently disappointing, concerns that the Fed is tightening monetary policy into a slowdown and sentiment deteriorating, U.S. stocks will struggle to sustain gains amid waning risk appetite. For this reason, we shouldn’t be surprised if traders continue to fade any rallies.
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—Written by Diego Colman, Market Strategist for DailyFX