Quick Overview:

  • Consumer confidence slipped this month, and rising gasoline and other goods prices forced two-thirds of households to cut spending, the Conference Board said Tuesday, citing a survey.
  • The Consumer Confidence Index fell 0.7 points to 93.1, with pessimism deepening among younger and older consumers, while optimism rose among those aged 35 to 54.
  • "Confidence dipped slightly in May, as the inflationary impact of the Middle East war intensified," Dana Peterson, chief economist at the Conference Board, said in a statement.

Deep Insights:

Consumer sentiment fell to a historic low this month, with households frustrated by surging gasoline prices, according to another survey by the University of Michigan. The university said last Friday that nearly three-fifths (57%) of consumers spontaneously mentioned that high prices were eroding their financial situation, up 7 percentage points from April.

Compared with the Conference Board, the University of Michigan places more emphasis on consumers' financial conditions, while the former focuses more on the labor market. The labor market has recently shown signs of strengthening.

"Consumers' assessments of current business conditions and the labor market were slightly weaker than last month, but expectations for six months ahead improved slightly, partially offsetting the negative impact," Peterson said.

Consumers' open-ended responses in the survey leaned pessimistic, with mentions of gasoline, oil, and overall prices rising for the second consecutive month, the Conference Board said.

Among the two-thirds of consumers cutting spending, most reduced purchase quantities and delayed big-ticket purchases, planning to limit spending on clothing, footwear, hobby items, games, and toys.

The selective tightening appears to have begun last month, with U.S. Census Bureau data showing retail sales growth slowing from 1.6% to 0.5%.

The slowdown in retail sales growth signals "demand destruction due to rising prices," EY said in a report Tuesday, noting that sales volumes for healthcare, autos, clothing, gasoline, and furniture declined last month.

Consumers are increasingly relying on savings and credit, "but these resources are limited, especially as some areas already show default risks," EY said.

EY noted that inflation has exceeded wage growth for the first time since April 2023, intensifying financial pressure on middle- and low-income households.

"The longer the Middle East conflict lasts, the more severe and widespread inflationary pressures may become. In the coming months, rising fertilizer prices will push up food inflation, while increased transportation and production costs from higher energy and input costs could pass through to goods and services prices," EY said.

EY believes that successive "supply shocks" from the pandemic, high tariffs, and the Iran war are gradually slowing economic growth.

"Fortunately, the three pillars of economic growth—affluent consumers, AI investment, and asset price appreciation—continue to provide a solid but increasingly narrow foundation for growth," EY said.

According to EY data, corporate investment in AI-related equipment and software drove annualized economic growth by 1.4 percentage points in the first quarter, far exceeding the 1 percentage point contribution from consumer spending.

"The risk is that an economy with a narrow base is more vulnerable to headwinds," EY said.

EY projects GDP growth of 2.1% in 2025, slowing to 1.8% this year and 1.9% in 2027.