Consumer Sentiment Plunges – 2nd Lowest Reading in History
In May 2025, consumer sentiment in the United States fell sharply, with the University of Michigan’s preliminary Consumer Sentiment Index dropping to 50.8. This marks the second lowest reading since the survey began in the 1940s and reflects growing unease among American consumers about the economic outlook.
The sharp decline from April’s level of 52.2 surprised many economists who had anticipated a slight rebound. Instead, the drop underscores increasing concern over persistent inflation, rising prices, and the impact of ongoing trade disputes. The index has now fallen nearly 30% since December 2024.
A significant contributor to the downturn is the widespread mention of tariffs and trade policies by survey respondents, with concerns mounting over their potential to drive up prices further. Inflation expectations have also surged, with consumers projecting a 12-month rate of 7.3%, up notably from the previous month.
This decline in sentiment was observed across nearly all demographic and political groups, suggesting a broad-based anxiety about the direction of the economy. The persistent erosion in consumer confidence could dampen household spending, a key driver of economic growth, and poses a major challenge for policymakers working to restore stability.
Historically, consumer sentiment drops are driven by a combination of economic, political, and social factors. Here are the most common causes:
1. High Inflation
- Why it matters: When prices rise quickly, consumers feel their purchasing power eroding.
- Historical examples:
- 1970s stagflation era.
- Early 2020s inflation spike post-COVID.
2. Recession or Fear of Recession
- Why it matters: Job insecurity, declining investment, and falling asset prices lead to pessimism.
- Historical examples:
- 2008–2009 Global Financial Crisis.
- Early 1980s recession (triggered by Fed rate hikes to tame inflation).
3. Job Market Deterioration
- Why it matters: Rising unemployment or fear of layoffs erode confidence in personal financial stability.
- Historical examples:
- Early 1990s and 2001 recessions.
4. Stock Market Crashes or Volatility
- Why it matters: Big market drops reduce household wealth and signal economic trouble.
- Historical examples:
- Black Monday (1987).
- Dot-com bust (2000).
- COVID crash (March 2020).
5. Sharp Increases in Interest Rates
- Why it matters: Higher borrowing costs make mortgages, loans, and credit cards more expensive.
- Historical examples:
- Volcker rate hikes (early 1980s).
- Fed tightening cycles like 2022–2023.
6. Political Uncertainty or Instability
- Why it matters: Government shutdowns, contentious elections, wars, or geopolitical tensions increase economic uncertainty.
- Historical examples:
- Watergate scandal (1970s).
- 2011 debt ceiling standoff.
- Russia-Ukraine war (2022).
7. Major Policy Shocks
- Why it matters: Sudden changes like new taxes, tariffs, or regulations can disrupt economic expectations.
- Historical examples:
- Trump-era tariffs (2018–2019).
- COVID-era lockdowns and mandates.
8. Global Crises
- Why it matters: Events like wars, pandemics, or global financial disruptions ripple through the U.S. economy.
- Historical examples:
- 9/11 attacks (2001).
- COVID-19 pandemic (2020).
9. Housing Market Instability
- Why it matters: Housing is a major source of wealth; downturns hurt consumer confidence and spending.
- Historical examples:
- Subprime mortgage crisis (2007–2009).
- Rising mortgage rates post-2022 slowing housing affordability.
In essence, anything that significantly alters consumers’ perception of their future financial health or the broader economic trajectory can cause sentiment to drop. The steeper or more unexpected the change, the more dramatic the decline in sentiment.