A Gloomy Outlook? Why This Dip in Consumer Sentiment Might Actually Matter This Time

Remember when consumer sentiment tanked a couple of years ago, and yet the economy stubbornly kept chugging along? Many economists pointed to a disconnect between how people felt and how they actually spent. But a new wave of pessimism is washing over American consumers, and this time, the underlying reasons are raising more serious concerns that the previous resilience might not hold.

A Shift in the Wind: It's Not Just About Prices Anymore

The inflation shock of the early 2020s certainly soured the national mood, seemingly breaking the traditional link between negative sentiment and economic downturn. However, the factors driving the current slump in consumer confidence appear to be different and, in some ways, decidedly more ominous.

Alarm Bells Ringing: Sentiment Hits Near Record Lows

Recent preliminary data from the University of Michigan paints a stark picture. Consumer sentiment plummeted to its second-lowest level on record this month, hitting 50.8. The only time it was lower was in June 2022, when inflation peaked at a painful 9%. This alone is cause for attention, but digging deeper into the numbers reveals a more troubling narrative.  

Job Security Fears Surge to Levels Not Seen Since the Great Recession

A particularly concerning data point is the dramatic increase in the number of Americans who anticipate rising unemployment. A staggering two-thirds of consumers surveyed by the University of Michigan expect joblessness to increase over the next 12 months. This is the largest proportion since the aftermath of the 2009 financial crisis. What's more, this negative outlook has been steadily building, more than doubling since November.

This starkly contrasts with the consumer sentiment landscape in recent years. Throughout 2022, even amidst high inflation, concerns about the labour market didn't reach such elevated levels. On average, only around 32% of consumers anticipated rising unemployment that year, a figure not drastically higher than the pre-pandemic level of 27% in 2019.

The Wealth Effect Wobbles: Even the Rich Are Worried

Historically, wealthier Americans, who significantly influence aggregate spending, tend to have a more positive economic outlook than lower-income groups. But this long-standing trend has seemingly broken. The University of Michigan's data reveals a convergence of expectations, with all income groups now anticipating worsening economic conditions. This unified pessimism across the income spectrum is a significant warning sign for the future of consumer spending, a red flag that was notably absent during the sentiment slump of 2022.

"We're still seeing huge declines across income but most notably at the top of the income distribution," explains Joanne Hsu, the head researcher of the University of Michigan survey, highlighting the breadth of this growing unease.

Tariff Trauma: A New Source of Economic Anxiety

While higher prices fuelled negative sentiment in previous years, consumers this time are pointing a finger at a specific policy: tariffs. An overwhelming 75% of respondents spontaneously mentioned tariffs as a potential driver of inflation and economic damage in May, a significant jump from 60% in April.  

Hsu emphasises that the concern isn't solely about the magnitude of the tariff rates. "Consumers are specifically concerned about instability, unpredictability, and uncertainty around trade policy, and they broadly believe that uncertainty will generate upward pressure on inflation."

Personal Finances Under Pressure: A Looming Shock?

The survey paints a picture of consumers bracing for a significant hit to their personal finances. Assessments of their current financial situation plummeted to the lowest level since 2009, while their outlook on future finances sank to a record low. This suggests a deep-seated expectation of weakening incomes and increased financial strain.

The Counter-Narrative: Is Sentiment Just Noise?

Interestingly, some economists, including a recent study from the Kansas City Fed, argue that the recent dip in sentiment might not significantly alter spending predictions for 2025, citing a historically weak correlation between how consumers feel and how they act. Even Fed Chair Jerome Powell acknowledged this earlier in the month, while cautiously noting the "speed and size" of the current sentiment decline. Furthermore, official government data still shows cooling inflation and few signs of widespread private-sector layoffs.

The Bottom Line: Tariffs the Deciding Factor?

Despite the counterarguments, the current confluence of factors – widespread concern about job security, unified pessimism across income levels, and specific anxieties about the inflationary impact of tariffs – presents a different and potentially more precarious situation than the sentiment dip of 2022.

The tariffs, in particular, will serve as a crucial test of whether the previous disconnect between sentiment and the economy was a temporary anomaly or if a new, more sensitive dynamic is emerging. The final consumer sentiment data for this month will be closely watched, especially to see if any potential pause on some China tariffs leads consumers to revise their increasingly gloomy expectations. The economic chugging of the recent past might be facing a much tougher terrain this time around.

Disclaimer: Please note that the economic analysis and consumer sentiment data discussed in this blog post are based on the information provided in the source material, which reflects data up to early May of the referenced year (based on the context of the article). Economic conditions and consumer sentiment are subject to change. This analysis is for informational purposes only and should not be considered financial or investment advice. Readers should consult with qualified financial professionals for personalised guidance based on their individual circumstances and the most current economic data.