Why the consumer sentiment plunge is different now

Axios

19-05-2025

The economy kept chugging along the last time consumer sentiment hit rock-bottom levels.
But some economists worry that resilience isn't going to hold this time around, as Americans signal worries about their income and the labor market in ways not seen in 2022.
Why it matters: The early 2020s inflation shock broke the tenuous link between sour sentiment and the economy. But the indicators pushing sentiment indices now are different, and in some respects, more grim.
What's new: Preliminary data shows consumer sentiment hit the second-lowest level on record this month, according to the University of Michigan.
The consumer sentiment index fell to 50.8 in early May, a low second only to June 2022, when the index hit 50 (and inflation peaked at 9%).
By the numbers: About two-thirds of consumers surveyed by the university say they anticipate unemployment to rise over the next 12 months, the largest share since 2009. It marked the fifth straight monthly increase, bringing the share to more than double in November.
Consumer views of the labor market didn't deteriorate nearly as much in recent years. On average, roughly 32% of consumers said the same each month in 2022, not drastically higher than the 2019 figure of 27%.
The intrigue: The richest Americans — who drive aggregate spending in the U.S. — typically feel better about the economy than lower-income groups. But not anymore.
Expectations have converged, with all income groups anticipating worse economic conditions, according to the University of Michigan, a warning for the health of consumer spending that was missing in 2022.
"We're still seeing huge declines across income but most notably at the top of the income distribution," Joanne Hsu, head researcher of the University of Michigan survey, tells Axios in an email.
Between the lines: Higher prices weighed on sentiment in the past few years, though consumers were not calling out a specific policy as the root cause.
This time around, respondents point specifically to tariffs as potentially inflationary and economically damaging. Nearly 75% spontaneously mentioned tariffs in May, up from 60% of respondents in April.
Inflation expectations are running well above those seen in 2022, when inflation was actually high. Year-ahead inflation expectations surged to 7.3% in early May, up almost a full point, to the highest level since 1981.
What they're saying:"It's becoming more clear from the open ended comments it's not just about the magnitude about the tariff rates," Hsu says.
"Consumers are specifically concerned about instability, unpredictability, uncertainty around trade policy, and they broadly believe that uncertainty will generate upward pressure on inflation."
The big picture: The survey suggests consumers expect a large shock to their personal finances, with many reporting weakening incomes.
Their assessments of their personal finances fell 10 points in early May to the lowest since 2009, while the outlook on their finances dropped to the lowest on record.
The other side: A study by the Kansas City Fed released Friday found the recent sentiment slump did not "meaningfully alter" its predictions of 2025 spending growth, noting the modest tie between how consumers feel and what they do. Others agree.
"I think going back a number of years the link between sentiment data and consumer spending has been weak," Fed chair Jerome Powell said earlier this month. "On the other hand, we haven't had a move of this speed and size," he added.
The bottom line: There are few signs of mass private-sector layoffs, while the government data shows inflation is cooling. Consumers expect gloom anyway.
To say that would have been accurate at any point in the past few years.
The tariffs will test whether the sentiment-economic disconnect is a one-time phenomenon or the new normal. The final sentiment data out later this month will reveal whether "the pause on some China tariffs leads consumers to update their expectations," the university said.