Consumer sentiment has fallen to its lowest recorded level, driven by dissatisfaction over price increases stemming from the US-Israeli conflict with Iran. The University of Michigan’s latest consumer survey, released on Friday, indicated a decline in sentiment of 11% early this month, resulting in a reading of 47.6. This figure is lower than any recorded in the post-World War II era, encompassing periods such as the Great Recession, the pandemic downturn, and the subsequent historic inflation surge. “Open-ended comments indicate that a significant number of consumers attribute adverse economic changes to the Iran conflict,” stated Joanne Hsu. “Demographic groups across age, income, and political party all experienced declines in sentiment, as did every component of the index, illustrating the pervasive nature of this month’s decrease,” she added.
Nevertheless, almost all of the survey responses were gathered prior to President Donald Trump’s declaration of a temporary — and increasingly tenuous — ceasefire with Iran earlier this week. Hsu indicated that sentiment “will likely improve after consumers gain confidence that the supply disruptions stemming from the Iran conflict have ended and gas prices have moderated.” Meanwhile, Americans’ expectations for inflation in the year ahead surged a full percentage point early this month to 4.8%, marking the largest monthly increase in a year, coinciding with Trump’s announcement of his sweeping “Liberation Day” tariffs. Long-term inflation expectations, projected over the next five to ten years, experienced a slight increase, climbing to 3.4% from 3.2% in March, marking the highest rate since November.
On Friday, the Bureau of Labor Statistics released a report indicating that the Consumer Price Index experienced a notable increase of 0.9% in March, marking the most significant monthly rise since 2022. This development elevated the annual rate to 3.3%, the highest level observed in almost two years. “Rising gas, diesel and airfare prices are already surging and squeezing American households,” stated Heather Long. “This is only the beginning,” she stated. Although the current record-low sentiment is concerning, the primary focus for economists is its potential impact on consumer spending, which constitutes approximately two-thirds of the US economy. A reduction in consumer spending in the US would exert pressure on businesses by diminishing their profits, adversely affecting economic growth, and ultimately leading to a potential recession. In February, prior to the intensification of the Iran conflict, consumer spending remained robust, as indicated by data from the Commerce Department released earlier this week. Recent years have seen episodes of pessimism that did not result in diminished spending, as evidenced during the inflation surge following the pandemic and the tariff increases of the previous year. Economists suggest that this situation may persist, provided the US labor market does not experience any decline.
Despite the average job growth over the past three months exhibiting weakness when adjusted for significant monthly fluctuations, the unemployment rate continues to be historically low, standing at 4.3%. Recent data on new applications for unemployment benefits indicates that firms are currently retaining their workforce. However, investors and economic policymakers generally perceive an ongoing and unsettling risk of rising unemployment. Once layoffs begin to surge, it is probable that Americans will be compelled to reduce their spending, particularly given the prevailing negative sentiment. “Negative sentiment is just one of the several ways by which the Iranian conflict will permeate through the US economy,” Oren Klachkin stated in an analyst note Friday. “Given that the conflict remains unresolved, we anticipate observing softer readings in the future.”