Sentiment fell back about 10% in May, a departure from three consecutive months of very little change in consumer views, according to the University of Michigan Surveys of Consumers.

Although consumers’ views about their personal finances were little changed this month, their outlook for short-run business conditions declined notably in May, said U-M economist Joanne Hsu, director of the Surveys of Consumers.

“Strength in household incomes has been the primary source of support for robust consumer spending over the past couple of years, so a softening in labor market expectations is concerning and—if it continues—may lead to a pullback in consumers’ willingness to spend,” Hsu said. “Furthermore, consumers expect interest rates to remain high in the future, which will make it even more difficult for consumers to make large purchases.”

Consumers expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead. Still, sentiment remains almost 20% above a year ago and 40% above the all-time historic low in June 2022, reflecting how much consumer views have improved as inflation slowed, though sentiment remains about 18% below the historical average.

Worries emerge that unemployment rates may rise

Expectations over labor markets, which had remained quite strong for much of the last year despite frequent news about layoffs and strikes, fell markedly this month, according to Hsu. About 38% of consumers now anticipate that unemployment rates will rise in the year ahead, compared with about 32% in the preceding five months.

Furthermore, consumers expect their income growth over the next year to slow as well. Taken together, at this time consumers expect a modest softening in labor markets, and the months ahead will reveal if these labor market expectations will continue to weaken.

Consumers anticipate persistence in high interest rates

The Fed has held interest rates steady at an elevated level since last August. The share of consumers expecting interest rates to fall during the next year reached 37% in January 2024—its highest reading since 2008—but has since tumbled to only 26%. This indicates that consumers expect high interest rates to persist, and indeed, worries over interest rates were visible throughout the survey.

In recent months, a rising share of consumers have blamed high interest rates or tight credit for poor buying conditions for homes and cars. Interest rates were less of a concern for durable goods; in contrast, the sharp deterioration seen in buying conditions for durables was largely attributable to high prices.

Consumer Sentiment Index

The Consumer Sentiment Index fell to 69.1 in the May 2024 survey, down from 77.2 in April and above last May’s 59.0. The Current Index fell to 69.6, down from 79.0 in April and above last May’s 65.1. The Expectations Index fell to 68.8, down from 76.0 in April and above last May’s 55.1.

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.