The latest University of Michigan report shows a troubling drop in U.S. consumer confidence, signaling potential weakness in household finances alongside a worrying increase in consumer inflation expectations.

"Consumer sentiment retreated about 13% this May following three consecutive months of very little change. This 10 index-point decline is statistically significant and brings sentiment to its lowest reading in about six months," Surveys of Consumers Director Joanne Hsu, said.

UMich Consumer Sentiment Report For May: Key Highlights

  • The University of Michigan consumer sentiment index eased from 77.9 in April to 66.5 in May, missing expectations of 76, according to preliminary data. It marks the lowest level in consumer sentiment since November 2023.
  • The sub-index for consumer expectations tumbled from 76 to 66.5, well below the expected 75.
  • The sub-index for current conditions fell from 79 to 68.8, hitting a 6-month low, missing the predicted 79.
  • The year-ahead inflation expectations rose further from 3.2% to 3.5%, topping the 3.2% expected. Long-term inflation expectations rose from 3.1%.
Economist Takeaways

According to Hsu, "Consumers in western states exhibited a particularly steep drop. While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions."

She emphasized that consumers are expressing concerns about the possibility of inflation, unemployment, and interest rates all trending unfavorably in the upcoming year.

"Year-ahead inflation expectations rose from 3.2% last month to 3.5% this month, remaining above the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations remain elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic," she added.

Market Reactions

Stocks slightly trimmed daily gains following the release of the University of Michigan's Consumer Sentiment report.

The S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust (SPY  ), was 0.3% higher at 10:08 a.m. in New York, while the tech-heavy Nasdaq 100, as monitored through the Invesco QQQ Trust (QQQ  ), rose 0.5%.

The dollar saw a marginal uptick, aided by the hotter-than-forecasted consumer expectations data. Treasury yields were slightly higher on Friday, sending bond-related ETFs, such as the iShares 20+ Year Treasury Bond ETF (TLT  ), lower.