Consumer Sentiment Weakens Due to Inflation and Job Worries

Consumers are souring about the near-term outlook — on inflation, job prospects and interest rates.

Where there’s worry, there’s possibly some saving for a rainy day at the expense of spending now.

The latest Index of Consumer Sentiment published Friday (May 10) by the University of Michigan declined about 13% in May, measured month over month. The university noted that the 67.4 reading is the lowest level seen in six months.

“While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions,” Surveys of Consumers Director Joanne Hsu said in a statement. “They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.”

The survey noted that year-ahead inflation expectations rose from 3.2% last month to 3.5% this month. Long-run inflation expectations inched up, from 3% last month to 3.1% this month.

Near-Term Headwinds

The clouds over the near-term outlook are massed in PYMNTS Intelligence data. As detailed in one Paycheck-to-Paycheck Report, and a few months into 2024 — and continuing a two-year trend — consumers’ wage increases have lagged inflation. Only about 38% of workers anticipate wage increases this year, down from 43% who expected wage increases in 2023. Those living paycheck to paycheck and having issues keeping pace with their bills are even more pessimistic. Just 29% said they expect a salary increase in the year ahead.

With those pressures in place, the most obvious solution might be to find a new job, and one that pays higher wages. But there’s some reticence to do so. Coming into 2024, just one in five U.S. workers said it was highly likely they would switch jobs this year. The tally rose to 34% of consumers with issues paying their bills, and to about 21% for those who live paycheck to paycheck without issues paying bills.

The sentiment data — with some worries about the job market — may throw some cold water on those ambitions.

Some Tough Choices

The only levers left to pull in the face of sticky inflation and worries about job security may be to save for the proverbial rainy day. Consumers told PYMNTS that they deplete 67% of all available savings, on average, every four years. Among paycheck-to-paycheck consumers, the average recurrence drops to once every 2.5 years.

We’ll get some more insight into spending, with economic data being released next week on retail sales and inflation. But in the most recent readings on personal consumption and savings rates, government data showed that the personal saving rate as a percentage of disposable income fell to 3.2%, which was 0.4% lower than the February reading and down by nearly 2% last year. Interest payments are higher too, which indicates that the wiggle room to replenish savings is limited.

The other lever lies with throttling back on spending, which is already happening with low-income consumers, per earnings season commentary. PYMNTS data found that the stage has been set here, as the overall share of consumers cutting down on nonessential spending stood at more than 61%.