Americans’ views of the economy continued to sour in May, as the University of Michigan’s consumer sentiment index dropped to a preliminary reading of 50.8, down 3% from the final reading of 52.2 in April. It’s the second-lowest reading for the index in data going back to the 1970s, behind only June 2022.
Inflation expectations worsened, too. Consumers now expect to see inflation hit 7.3% in the next year, up from the 6.5% rate projected last month. Long-term inflation expectations rose from 4.4% to 4.6%.
Worries about President Trump’s trade war played a major role in the negative sentiment. “Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April,” said survey director Joanne Hsu. “[U]ncertainty over trade policy continues to dominate consumers’ thinking about the economy.”
Most of the survey was completed before China and the U.S. agreed earlier this week to reduce their historically high tariffs for 90 days. When the sentiment index for May is updated at the end of the month, we’ll get a sense of whether the temporary cooling of the trade war helped ease consumers’ minds, or if the continued instability and still relatively high tariffs continue to weigh on the outlook.
Paul Ashworth, an economist at Capital Economics, told The Wall Street Journal that the preliminary reading is “a bit disconcerting,” but added that he thinks “it’s a safe bet that inflation expectations will go down and sentiment will rebound in the final reading for May.”
Still, although the worst of the tariff standoff may have passed, consumers continue to face the threat of higher prices in the coming months. On Thursday, retail giant Walmart warned that higher prices are almost certainly already in the pipeline.
“We’re wired for everyday low prices, but the magnitude of these increases is more than any retailer can absorb,” Walmart Chief Financial Officer John David Rainey told CNBC, referring to Trump’s tariff increases, which function as a tax on domestic consumption of imports. “It’s more than any supplier can absorb. And so I’m concerned that consumer is going to start seeing higher prices. You’ll begin to see that, likely towards the tail end of this month, and then certainly much more in June.”