Americans brace for a slowdown as consumer confidence slips

The Street

University of Michigan's latest consumer sentiment report reveals Americans are feeling less confident.

Transcript

00:00Joining me now is Joanne Hsu, Director of the Surveys of Consumers at the University of

00:04Michigan. Joanne, thanks so much for being here. It's a pleasure to be here.

00:09So Joanne, sentiment ticked down to 58.2 in August, which was slightly below expectations.

00:16Tell us, what is the takeaway about the consumer with a reading of 58.2?

00:21The main thing that's on consumers' minds right now is high prices and the threat of inflation

00:26going forward. And that picked up in August, primarily because tariff policy developments

00:32kind of re-escalated this month. Consumers are not necessarily expecting the worst case scenario

00:37that they had been bracing for in April and May in the wake of the reciprocal tariff announcements.

00:43But still, they're expecting continued uncertainty around tariff policy and the high tariffs that

00:48are currently in place to lead to a resurgence of inflation going forward. And they're also

00:54expecting unemployment rates to rise in the year ahead.

00:59So how would you actually classify the consumer right now? Still confident, but cautious?

01:05I would say they are broadly quite wary about the future. They are, we saw deterioration in

01:12expectations on a number of fronts this month. We saw deterioration in expectations for business

01:19conditions, unemployment, inflation, income expectations firmed up just a little bit,

01:25but they're still pretty subdued compared to six months ago or a year ago. So consumers aren't really

01:30feeling that confident at all. They're not feeling as bad as they were in April, but they're really

01:36bracing for a slowdown.

01:38How closely does sentiment align with actual consumer spending behavior, though? Because we also saw

01:45today's personal income and spending report was reflective of a consumer that's holding up quite

01:50well. So why is there this disconnect?

01:53So historically speaking, you know, we've been collecting data on sentiment since 1946.

01:57Typically, when people don't feel confident, they tend to pull back their spending. And when they feel

02:02confident, they're more likely to spend. And I actually think today, this morning spending report

02:06bears that out because that reflects spending in July. And in July, we had a pretty big jump in sentiment

02:12compared to April and May. And it's the they gained some confidence over the summer when

02:20tariff policy announcements slowed down a bit. But August is a different story. Things started to pick

02:26up. And furthermore, it is true that after the pandemic, people felt really had really poor levels

02:33of sentiment that they were willing to spend through it. That's because labor markets were really strong

02:37at that time. And they had very, very reliable incomes. People who wanted a job could get a job.

02:43And so even though they didn't feel good about the high inflation they were seeing, they didn't feel good

02:46about the economy, they had the income to support continued spending. And when we look at about two-thirds

02:53of consumers, they expect unemployment to rise in the year ahead. Their income expectations are not strong right now.

02:59So that support that we have for post-pandemic spending just isn't there right now.

03:03And we've heard this for quite some time. Consumers say the economy feels worse than the data actually

03:11shows. So is that just vibes? Or do you think there are cracks that the data just haven't caught yet?

03:18The data that people are talking about is typically backward looking data by definition. It's telling us where we

03:26are last month, last year. Whereas when we ask consumers about sentiment, we're asking them to

03:31project into the future. So the economic data that we're often talking about and the economic views

03:38and expectations of consumers, they're not even covering the same time period. We're asking people

03:42where they think things are going because that's what's going to affect their decisions.

03:46And what's pretty clear is that consumers are quite worried that the economy is going to slow down

03:53in the future, regardless of where the economy was last month or last year.

04:01So if we would look at the sentiment report as an early recession indicator, are you picking up warning

04:07signs that the economy could tip into a downturn or an actual recession?

04:12What we're seeing very clearly is that consumers are expecting something closer to stagflation going

04:17forward. They are expressing perceptions of weakness, not just with business conditions and unemployment,

04:25but also they're expecting inflation to come back. So what's really tricky about this for policymakers is

04:31that this is showing negative signals for both sides of the Fed's dual mandate. And so broadly speaking,

04:38they're expecting both unemployment and inflation to get worse in the year ahead. And that is a very

04:44challenging situation for policymakers. If the Fed does start cutting rates in September,

04:51could that have or will that have a direct impact on the sentiment report?

04:57It could. It depends on what the downstream effects are. Certainly, it is true that if borrowing costs

05:04for consumers do tick down, that consumers will feel like it will improve buying conditions for big

05:11ticket items like homes or durables or cars. But that's also going to depend on what that does to

05:19prices. If inflation starts coming down, then that could lead to an increase in confidence for consumers.

05:29But if inflation continues to creep up or even come surging back, as many consumers are expecting,

05:35then it won't matter if interest rates are low. If inflation comes roaring back, it's going to weigh

05:43on consumers if that's the case. What do you think has done more damage to consumer psychology,

05:51inflation or high interest rates? What we have seen very, very clearly since the tail end of the pandemic

06:01is that high prices and inflation have been absolutely the top concern on consumers minds.

06:07We have been seeing that pretty much continuously for the last three years. And the major uptick in

06:15inflation expectations that we saw in 2025 are directly related to tariff policy. Now,

06:21high interest rates are certainly something that matters to consumers, particularly when it comes

06:26to major purchases like homes and cars. But it's very clear from our data when we look at the open

06:33ended comments on these major purchases that it's not just high interest rates, it's also high prices.

06:39So unless prices of homes come down, a marginal reduction in borrowing costs for mortgages isn't

06:47necessarily going to make people feel like it's a good time to buy a house.

06:51OK, so what's the takeaway for investors then? Because as we said, the personal income and spending

06:59report showed that consumers, although wary, are still spending, still making money. The stock market

07:05is very close to all time highs. Yet this data paints a different picture. So what's the takeaway for

07:12investors? What I think is important for market watchers to note is that consumers are bracing for

07:19and are anticipating a slowdown in multiple dimensions of the economy. It's not just thinking

07:25that one aspect of the economy is going to deteriorate. They are worried about business

07:29conditions, unemployment, their own incomes and inflation, all of the above. And as a result,

07:35we're not in the same moment as we were in 2022. So, you know, I think it's important to

07:42look at the consumer outlook with caution. Consumers see a lot of warning signs.

07:46They are many of them are expecting that weakness, upcoming weakness in labor markets may affect them.

07:53So we can't necessarily be expecting the type of consumer resilience we saw in 2022. But if labor

08:00markets remain strong, then then consumers may end up being more resilient. But as again,

08:07that's not what consumers are expecting at this time. They are quite worried about the future of labor

08:12markets. All right. Jobs really the backbone of consumer sentiment. Joanne Hsu, University of Michigan,

08:18thank you so much for shedding some light on the state of the consumer right now. Thanks for having me.

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