US Consumer Sentiment Declines As Low Earners Become More Concerned

Consumers are feeling better about inflation, but low-income earners are concerned the economy is turning, a national survey on public perceptions of the economy showed. 

The Michigan Consumer Sentiment Index continued to tick lower in July. It’s the lowest level since November 2023, and it reflects four consecutive months of decline for the widely-followed measurement.

Survey director Joanne Hsu notedthat consumer sentiment over the last three months has remained “virtually unchanged.”  

“Sentiment has lifted 33% above the June 2022 historic low, but it remains guarded as high prices continue to drag down attitudes, particularly for those with lower incomes,” Hsu wrote. “Labor market expectations remain relatively stable, providing continued support to consumer spending.”

Low Earners Feeling Worse Over Economy

The report highlighted the differences between high- and low-income earners, wrote Oren Klachkin, a financial market economist at Nationwide.

“In short, high-income earners are generally enthusiastic while lower-income cohorts are feeling the heat,” Klachkin wrote. “Lower-income households will suffer the greatest pain during the upcoming economic slowdown since they haven’t benefited from the run-up in stock prices and housing values to help them weather the pending slowdown in income growth.”

Inflation Expectations Improve

The public continues to feel better about inflation, with year-ahead expectations for price increases coming in at 2.9%, dropping for the second straight month, while expectations on price growth for five years out remained at 3%, still above the pre-pandemic range. But while inflation expectations improved, high prices continued to weigh on perceptions about the economy.

“Despite slowing inflation, consumers appear to remain unhappy with the high level of prices generally, and food prices in particular,” wrote Scott Hoyt, analyst at Moody’s. “Interest rates remain painfully high and unlikely to return to pre-pandemic levels in the foreseeable future. Homes are unaffordable for many.”

The Federal Reserve closely follows consumer inflation expectations, factoring in public sentiment when making decisions on interest rate levels. 

“Gradually diminishing inflation should minimize the risk of an unexpected pop in expectations and help set the stage for a September Fed rate cut,” Klachkin wrote. 

Sentiment Expected to Improve

While the survey has shown elevated consumer pessimism for several months, there are reasons to expect confidence to improve, said Hoyt.

Gas prices should remain near current levels, interest rates and price levels are trending lower and the labor market is slowing but still strong. 

“Given the still-low level of this index, large gains seem likely at some point,” Hoyt wrote. “Though confidence should trend higher, the timing of gains is highly uncertain.”