Consumer sentiment slipped 7% due to renewed concerns about the trajectory of the economy, erasing nearly half of the gains achieved since the all-time historic low from last June.

Consumers’ worries about the outlook of the economy in both the short and long run worsened considerably given the negative news about the economy, including the debt ceiling crisis. With the persistence of high prices, consumers’ assessments of their personal finances were little changed from last month, said University of Michigan economist Joanne Hsu, director of the Surveys of Consumers.

“Consumer resilience has been supported by strong incomes thus far. However, high inflation continues to erode consumers’ living standards, and their confidence in the economy remains woefully negative,” Hsu said. “If the debt ceiling is breached, we will not be able to depend on consumer resilience to prop up the economy and avoid the catastrophic economic consequences to follow.”

Economic outlook weighed down by debt ceiling crisis

The year-ahead economic outlook plummeted 17% from last month. Long-run expectations slid by 13% as well, indicating that consumers are concerned any recession to come may cause lasting pain. While consumers may not follow the details of the debt ceiling debate, they do understand the meaning of the “dire economic consequences” that can follow a failure to pay debt obligations.

During the 2011 debt ceiling crisis, sentiment also slid sharply, reaching levels that typically indicate a recession to come. Consumer views recovered quickly when the ceiling was lifted and recession averted. This month, when asked about news they heard about developments in the economy, consumers’ reports reached their most negative level in about a year, primarily due to unfavorable news about the government as well as unemployment.

About 52% of consumers reported that the government is doing a poor job with economic policy, the worst reading since last July. Independents registered the strongest drop, consistent with mounting frustration over the standoff between Democrats and Republicans.

Views of housing markets worsen

In spite of falling house prices in many parts of the country, home buying conditions deteriorated considerably this month. About 80% of consumers said it was a bad time to buy houses, compared with 73% in April and 77% a year ago. About 54% of consumers reported worries about high prices, more than triple the historical average.

In addition, a growing share of consumers saw high interest rates as a negative factor for buyers and sellers alike. Selling conditions for houses worsened in May, with 41% of consumers reporting it was a bad time to sell, up from 38% last month and 17% a year ago. With 67% of consumers expecting interest rates to continue to rise in the year ahead, buying and selling conditions are unlikely to improve anytime soon.

Consumer Sentiment Index

The Consumer Sentiment Index fell to 59.2 in the May 2023 survey, down from 63.5 in April and above last May’s 58.4. The Current Index fell to 64.9, down from 68.2 in April and above last May’s 63.3. The Expectations Index fell to 55.4, down from 60.5 in April and above last May’s 55.2.

About the surveys

The Surveys of Consumers is a rotating panel survey at the University of Michigan Institute for Social Research. It is based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by phone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for the Current and Expectations Index, the minimum is 6 points.