American consumer confidence has fallen to the lowest level ever recorded. The University of Michigan's consumer sentiment index dropped to a final reading of 44.8 in May, revised sharply lower from the preliminary 48.2 estimate and breaking below the previous all-time low of 50.0 set during the 2022 inflation surge. The collapse reflects the cumulative weight of war-driven energy costs, sticky inflation, and deepening pessimism about the economic outlook.
The details were uniformly bleak. Year-ahead inflation expectations surged to 4.8%, up from 4.2% in April, while long-run expectations jumped to 3.9% from 3.5% -- the highest since 1993. A record 57% of consumers spontaneously cited high prices as the primary factor eroding their personal finances, with gasoline prices up 28.4% year over year and fuel oil costs surging 54.3%.
What happened
The sentiment collapse has been building since the Iran conflict began in March, but the May reading represents an acceleration of the decline. Both the current conditions and expectations subindexes fell to record lows, indicating that consumers are unhappy with both their present financial situation and their outlook for the future. The breadth of pessimism is also notable -- sentiment declined across all income groups, age brackets, and political affiliations.
The inflation expectations component is particularly concerning for the Federal Reserve. When consumers expect higher prices in the future, they may demand higher wages and accelerate purchases, creating a self-fulfilling inflationary spiral. The jump in long-run expectations to 3.9% is nearly double the Fed's 2% target and suggests that inflation credibility is eroding among the general public.
Why it matters
Consumer spending accounts for roughly 70% of U.S. GDP, making sentiment a leading indicator of economic activity. While the correlation between sentiment and actual spending has weakened in recent years, the magnitude of this decline is unprecedented and historically associated with recession. Every prior reading below 55 has either coincided with or preceded a recession within six months.
The sentiment crash also complicates the Federal Reserve's policy calculus. The surge in inflation expectations gives the Fed reason to raise rates, but the collapse in consumer confidence argues for easier policy to support demand. This tension is the defining challenge facing new Chair Kevin Warsh.