US consumer confidence fell to its lowest level in six months in May on fears that political haggling over raising the debt limit could trigger a recession.
The preliminary reading of the survey conducted by the University of Michigan on the general index of consumer confidence stood at 57.7 points this month, the lowest reading since last November and down from 63.5 in April.
The institution’s survey also showed that long-term inflation expectations among consumers jumped this month to their highest reading since 2011, bad news for the Federal Reserve (Fed) after saying last week that it could pause the fastest monetary policy tightening cycle since the 1980s.
“This report has a bit of a stagflation feel to it…This rise in inflation expectations is likely to add to a lively debate over whether to hold or raise rates again at the June 14 meeting,” said Conrad DeQuadros. , Senior Economic Advisor at Brean Capital.
Joanne Hsu, director of the consumer survey, partly attributed the decline in confidence to the debacle in Washington, warning that “if policymakers fail to resolve the debt ceiling crisis, these gloomy views on the economy will exacerbate the disastrous economic consequences of non-payment”.
Weak correlation with spending
Some economists say that plummeting confidence and rising long-term inflation expectations should not be overemphasized, arguing that there is not a strong correlation with consumer spending.
“We have often seen consumer confidence plummet since Covid-19 disrupted the economy, but consumer spending is up and remains healthy,” said Robert Frick, corporate economist at Navy Federal Credit Union.
“As for inflation, everyone is bad at predicting it over the long term, including consumers, and inflation expectations have little effect on spending decisions anyway,” he added.
One-year inflation expectations dipped to 4.5% this month, after posting a 4.6% outlook in April.
Nonetheless, the five-year inflation outlook was raised to 3.2%, the highest reading since 2011.
