In May 2023, U.S. consumer sentiment experienced a significant downturn, reflecting growing worries about the economic repercussions of President Donald Trump's trade policies. The University of Michigan's Surveys of Consumers revealed that one-year inflation expectations surged to levels not seen since late 1981, highlighting escalating fears among Americans regarding the state of the economy.
The survey results indicated a notable decline in morale, particularly among Republican consumers, suggesting that even Trump's core supporters are beginning to feel anxious about the president's extensive tariffs. This week, retail giant Walmart announced it would start increasing prices by the end of the month due to the heightened costs associated with import duties. This decline marks the first drop in sentiment among Republicans since Trump's electoral victory in November 2022.
The ongoing slump in overall consumer sentiment and the rise in inflation expectations hint at a potential contraction in consumer spending, which could dampen economists' hopes for a rebound in economic growth this quarter. The economy had already contracted in the first quarter for the first time in three years, driven by a surge in imports as businesses sought to avoid the impending higher costs from tariffs. Additionally, retail sales showed minimal growth in April.
Christopher Rupkey, chief economist at FWDBONDS, emphasized that consumer anxiety extends beyond mere price hikes; many are concerned about potential shortages of goods, as reduced port activity may lead to product scarcity within months. The overall economic outlook appears increasingly bleak, raising questions about how long these conditions can persist without pushing the economy into a recession.
The University of Michigan's consumer sentiment index fell to 50.8 in May, marking the lowest level since June 2022, down from a final reading of 52.2 in April. Economists had anticipated a rise to 53.4. Notably, sentiment among Republicans dropped by 7%, countered by a slight improvement among independents, while Democrats retained a pessimistic outlook.
The survey was conducted between April 22 and May 13, concluding just days after the U.S. and China reached a temporary agreement to de-escalate their trade war. Under this deal, duties on Chinese imports were reduced from 145% to 30% for a 90-day period. The University of Michigan noted that initial consumer reactions mirrored the slight improvement in sentiment observed when the implementation of Trump's country-specific tariffs was postponed until July.
As concern over tariffs grew, nearly three-quarters of consumers mentioned them spontaneously, up from almost 60% in April. According to Joanne Hsu, director of the Surveys of Consumers, uncertainty surrounding trade policy continues to dominate consumer perceptions of the economy. Consumers' 12-month inflation expectations jumped to 7.3%, the highest level since November 1981, from 6.5% in April, with both Democrats and Republicans anticipating higher near-term inflation. This surge foreshadows rising prices in the coming months, despite stable consumer prices in April.
Auto manufacturers have also announced impending price hikes, and economists predict that inflation will accelerate by mid-2023. The long-run inflation expectations rose to 4.6%, the highest since March 1991, up from 4.4% in April, particularly influenced by increases among Republicans. Joseph Brusuelas, chief economist at RMS US, highlighted that rising inflation expectations complicate the Federal Reserve's monetary policy decisions.
Federal Reserve Chair Jerome Powell recently cautioned that the economy may be entering a period characterized by more frequent and potentially persistent supply shocks, posing challenges for both the economy and central banks. The U.S. central bank maintained its benchmark overnight interest rate within the 4.25%-4.50% range earlier this month.
Higher inflation signals were also evident in a separate report from the Labor Department's Bureau of Labor Statistics, which showed that prices for imported capital goods increased by 0.6% in April, while consumer goods prices (excluding motor vehicles) rose by 0.3%. Overall import prices, excluding tariffs, gained 0.1% after a 0.4% decline in March, defying economists' expectations for a larger drop.
Tariffs are additionally affecting the housing market, as indicated by a report from the Commerce Department's Census Bureau, which noted a 2.1% decline in single-family housing starts to a seasonally adjusted annual rate of 927,000 units—the lowest level in nine months. Permits for future single-family housing construction also fell by 5.1%, suggesting that these weak conditions may persist. A recent survey from the National Association of Home Builders revealed that sentiment among single-family homebuilders dropped to a 1.5-year low in May, with 78% of builders facing challenges in pricing homes due to uncertainty around material costs.
In conclusion, the current state of consumer sentiment, rising inflation expectations, and the looming threat of price increases signal a challenging economic landscape ahead. As consumers grapple with these issues, the potential for a downturn in economic growth continues to raise alarms among economists and market analysts alike.
