US Consumer Sentiment Plunges to 17-Month Low Amid Shutdown Fears
University of Michigan's index falls to 50.3, signaling potential headwinds for consumer spending as near-term inflation expectations rise.
A key gauge of U.S. consumer confidence tumbled in early November to its lowest level since mid-2022, as persistent concerns over a prolonged government shutdown weigh on American households ahead of the crucial holiday shopping season.
The University of Michigan’s preliminary consumer sentiment index dropped to 50.3, a significant decline from October’s 53.6 reading and well below economists' forecasts. The reading marks the weakest sentiment level recorded since June 2022, underscoring the fragile state of consumer morale in a high-interest-rate environment.
According to the official survey release, the sharp downturn was primarily driven by worries that a protracted political impasse in Washington could inflict further damage on the economy. Consumer spending accounts for roughly two-thirds of U.S. economic activity, and a sustained drop in confidence could signal a pullback in retail sales and services spending, impacting fourth-quarter growth.
Adding a layer of complexity for the Federal Reserve, the report presented a mixed picture on inflation. While long-term inflation expectations eased slightly to 3.6% from 3.9%, consumers' outlook for price increases over the next year ticked higher, rising to 4.7% from 4.6% in October. This persistence in near-term inflation anxiety could complicate the central bank's policy path, even as the headline economic mood darkens.
"This report is a clear warning shot for the economy," one market analyst noted. "The Fed wants to see inflation expectations anchored, but it cannot ignore a material slowdown in the consumer. This puts them in a difficult position."
Financial markets are grappling with the dual implications of the data. On one hand, weakening consumer activity could reduce inflationary pressures and give the Federal Reserve more reason to hold interest rates steady or even consider future cuts. On the other hand, it points to a more significant economic slowdown than previously anticipated, which could weigh on corporate earnings.
The Wall Street Journal reported that the decline was broad-based across income and age demographics, suggesting widespread economic anxiety. This souring mood poses a significant headwind for retailers, who depend on a strong year-end spending surge. The data suggests households may become more defensive, prioritizing savings over discretionary purchases as economic uncertainty grows.
Investors and policymakers will now be watching upcoming retail sales and inflation data with heightened scrutiny to determine whether this slump in sentiment translates into a tangible drop in economic activity.