US consumer sentiment worsened in May as Americans grew concerned about the economy's direction and a potential default of the US government's debt, according to a preliminary report from the University of Michigan Friday.
The political impasse over raising the debt ceiling has dragged on for weeks and is inching closer to the day the federal government will not be able to fully meet its financial obligations. Consumers are now taking notice.
"While current incoming macroeconomic data show no sign of recession, consumers' worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff," Joanne Hsu, director of the surveys of consumers at the University of Michigan, said in a release. "If policymakers fail to resolve the debt ceiling crisis, these dismal views over the economy will exacerbate the dire economic consequences of default."
The latest survey showed that the university's consumer-sentiment index fell by 9% in May. The index's latest decline wiped out more than half of its gains since recovering from the record low in June 2022.
"In Washington's past fiscal games of chicken, sentiment recovered within a few months of the crises ending," Bill Adams, chief economist at Comerica Bank, wrote in analyst note. "On the other hand, if the government defaults, it won't be pretty."
Pessimism among consumers can have an impact on their spending behavior if their expectations worsen and they decide to pull back. Some data have already pointed to demand for goods weakening some.
Slower spending
American households continue to cut down on spending, according to a separate report released Friday by the Federal Reserve Bank of New York.
Monthly household spending growth tumbled to 5.4% from a revised 7.1% in December, according to the New York Fed's Household Spending Survey, which is fielded every four months. The survey showed that Americans plan to rein in their spending even further as the year goes on: Expected monthly spending growth fell to 3.4% in April, dropping 0.6 percentage points, and landing in a realm not seen since December 2020.
Michigan's report showed US household spending was flat in March from the prior month, after limping just 0.1% in February. Retail sales sank 0.8% in March from the prior month, following a 0.5% decline in February. The Commerce Department releases April figures on retail spending next week, which will offer additional clues into how demand is shaping up as credit conditions tighten.
A trio of recent bank failures mean that banks are poised to toughen their lending standards even more, which can dampen demand. A recent survey of loan officers showed that banks were making it harder to access credit even before the failures of Silicon Valley Bank and Signature Bank. Stack on top of that the Federal Reserve's punishing interest-rate increases and still-high inflation, and consumers might just tap out.
Many economists, including those at the Fed, expect the US economy to slip into a recession later in the year. A recession is a broad economic downturn that would include weakness in consumption.
The Conference Board's sentiment survey showed that consumer confidence worsened in April as Americans became more worried about the jobs market. The business group's Consumer Confidence Index, which measures attitudes toward the economy and the job market, fell to 101.3 in April, down from 104 in March and marking the lowest level since July 2022.
The labor market is still going strong. Employers added 253,000 jobs in April, a robust gain, and the unemployment rate fell back to a 53-year low of 3.4% that month. That's good news, but the job market still isn't balanced, because "labor demand still substantially exceeds the supply of available workers," Fed Chair Jerome Powell said in his news conference after officials voted to raise the central bank's benchmark lending rate by a quarter point earlier this month.
-- CNN's Alicia Wallace contributed to this report.
