Daily Management Review

Consumer Mood In The United States Has Reached A Six-Month Low As A Result Of The Debt Ceiling Crisis


Consumer sentiment in the United States fell to a six-month low in May, partly to concerns that political wrangling over raising the federal government's borrowing limit could precipitate a recession.
The University of Michigan survey released on Friday also revealed that consumers' long-term inflation expectations have risen this month to their highest level since 2011. This is bad news for the Federal Reserve, which signalled last week that it may pause the country's fastest monetary policy tightening cycle since the 1980s.
"This report has a bit of a stagflationary feel about it," said Conrad DeQuadros, senior economic advisor at Brean Capital in New York. "This increase in inflation expectations is likely to add to a spirited discussion about whether to hold or hike again at the June 14 meeting."
The preliminary result for the overall index of consumer mood in the poll came in at 57.7 this month, the lowest reading since November of last year and down from 63.5 in April.
Reuters polled economists, who predicted a preliminary reading of 63.0. The current economic circumstances measure in the poll declined to 64.5 from 68.2 in April. Its index of consumer expectations fell to 53.4 from 60.5 the previous month.
Joanne Hsu, Director of Surveys of Consumers, ascribed the decrease in sentiment to the Washington catastrophe and cautioned that "if policymakers fail to resolve the debt ceiling crisis, these dismal views about the economy will exacerbate the dire economic consequences of default."
Without a debt ceiling rise, the nonpartisan Congressional Budget Office said on Friday that the country faced a "significant risk" of defaulting on payment obligations within the first two weeks of June.
Wall Street stocks were trading lower. The US dollar gained ground versus a basket of currencies. Treasury prices in the United States decreased.
Some economists warned against reading too much into the drop in sentiment and increase in long-term inflation expectations, claiming that there was no substantial association with consumer spending.
"We've seen consumer sentiment sink often since COVID scrambled the economy, but consumer spending has risen and now maintains a healthy level," said Robert Frick, corporate economist with Navy Federal Credit Union in Vienna, Virginia.
"As for inflation, everyone is poor at predicting it long term, including consumers, and inflation expectations have little effect on spending decisions anyway."
The one-year inflation expectation reading in the survey fell to 4.5% this month after rising to 4.6% in April. Its five-year inflation forecast increased to 3.2%, the highest since 2011, from 3.0% last month.
A jump in inflation expectations once compelled the Fed to execute a significant rate increase. Since March 2022, the Federal Reserve has lifted its benchmark overnight interest rate by 500 basis points to a range of 5.00%-5.25%.
However, inflationary news has been favourable this week, and this trend continued on Friday. While a second Labour Department report revealed that import prices rose in April for the first time since December 2022 as gasoline costs recovered, imported inflation pressures remained muted.
Import prices rose 0.4% in April after falling 0.8% in March. Prices fell 4.8% in the year to April, matching the drop in March. They have now fallen for three months in a row year on year.
The government revealed this week that consumer and producer price rises in April were the weakest in more than two years.
Imported fuel prices rose 4.5% in April, led by a 5.7% increase in petroleum prices, which more than offset a 17.4% drop in natural gas prices. Imported food prices increased by 0.2%.
Import prices remained steady excluding fuel and food. In March, these so-called core import costs fell 0.5%. Import prices from China declined 0.3%, continuing the year's decline. Year over year, they were down 1.9%. Imports from Japan, Canada, Mexico, and the European Union are all more expensive.
"This month's import price report offers evidence of cooling price dynamics working through the economy," said Matthew Martin, a U.S. economist at Oxford Economics in New York.
"Given our expectation for the Fed to hold rates high until year-end, the import price deflationary cycle will intensify in the months ahead."