#What is driving consumer pessimism in the U.S.?
Consumer sentiment in America is at a new low. For the first time since the 1950s, American consumers are reporting levels of pessimism not seen in decades. According to the University of Michigan, the Index of Consumer Sentiment dropped to 44.8 in the final May reading, marking a significant decline of 10% from the previous month’s figure of 49.8. This decline follows a previous record low set in June 2022, during a spike in inflation.
One of the primary reasons driving this collapse in sentiment is the rising cost of gasoline. Supply disruptions in critical areas like the Strait of Hormuz have led to soaring fuel prices, and consumers are acutely aware of this impact every time they refuel their vehicles. Notably, 57% of those surveyed identified high prices for basic necessities as a significant blow to their financial health.
#How are inflation expectations changing among consumers?
The ramifications of rising prices are evident in consumers’ inflation expectations, which are also shifting. Short-term inflation expectations for the next year increased slightly from 4.7% to 4.8%. While this may seem minor, the longer-term outlook is concerning. Expectations for inflation over the next five years surged from 3.5% to 3.9%, signaling a belief among consumers that high prices may persist for an extended period.
#Why are risk assets performing well despite pessimistic sentiment?
Interestingly, financial markets are not mirroring this pessimism. While households report severe financial distress, major risk assets are thriving. Recent reports revealed that Bitcoin and indices like the Nasdaq have witnessed notable rallies during this period of declining consumer confidence. The explanation seems to center around institutional investment; large-scale investors are actively contributing capital flows that support asset prices, irrespective of the underlying financial health of the average household.
#What implications does this have for investors?
The current economic landscape adds layers of risk for investors. The uptick in long-term inflation expectations could prompt the Federal Reserve to adopt tighter monetary policy. Higher rates usually translate to increased borrowing costs, which negatively impacts speculative assets, including cryptocurrencies and growth stocks. The historical precedent set in 2022, when aggressive interest rate hikes caused Bitcoin to plummet from about $47,000 to under $17,000, remains fresh in the minds of investors.
Additionally, it is crucial for traders to pay attention to the velocity of the recent decline in consumer sentiment. A drop from 49.8 to 44.8 within a month represents a notable 10% fall. Given that consumer spending constitutes approximately two-thirds of the U.S. GDP, the fact that 57% of respondents feel that rising essential prices are undermining their financial stability indicates that the conditions for sustained economic growth are becoming less favorable.