Consumers turned slightly more gloomy in May, as concerns about high inflation and rising interest rates dampened their enthusiasm about the economy, according to the monthly consumer confidence index issued Tuesday by the Conference Board.
Overall, the consumer confidence index ticked down to 106.4 from a revised 108.4 last month. The present situation index – a measure of how Americans feel about the current economy – declined to 149.6 from 152.9 in April. The expectations index – which reflects how people feel about the short-term outlook – fell to 77.5 from 79.0.
“Consumer confidence dipped slightly in May, after rising modestly in April,” said Lynn Franco, senior director of economic indicators at the Conference Board. “The decline in the Present Situation Index was driven solely by a perceived softening in labor market conditions.”
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“By contrast, views of current business conditions – which tend to move ahead of trends in jobs – improved,” Franco added. “Overall, the present situation index remains at strong levels, suggesting growth did not contract further in Q2. That said, with the expectations index weakening further, consumers also do not foresee the economy picking up steam in the months ahead.”
Tellingly, consumers showed less ardor for buying cars, homes and major appliances, as they shift from purchases of big-ticket goods to more spending on services.
“Vacation plans have also softened due to rising prices,” Franco said. “Indeed, inflation remains top of mind for consumers, with their inflation expectations in May virtually unchanged from April’s elevated levels. Looking ahead, expect surging prices and additional interest rate hikes to pose continued downside risks to consumer spending this year.”
The economy, which relies on consumer spending for roughly 70% of its output, is balanced between a strong labor market, robust consumer finances and the impact of consumer inflation running at an 8.3% annual clip. The Federal Reserve is raising interest rates to slow those price increases but at the cost of a slowing economy.
As gas prices have risen, along with groceries and energy costs, consumers are caught in the crossfire and are having to decide between taking a vacation and paying their bills.
“Spending plans are cooling but not plummeting as financial conditions tighten,” Jeffrey Roach, chief economist for LPL Financial, said. “This is exactly what Federal Reserve policy makers want to see.
The White House is paying attention as it battles low standings in the polls. President Joe Biden is set to meet with Fed Chairman Jerome Powell today, although there is not much more the Fed can do other than raising interest rates and paring back its accommodative monetary policy. Much of the increase in prices is tied to higher energy costs, which have been adversely affected by Russia’s invasion of Ukraine.