Key Points

  • University of Michigan consumer confidence fell for a second consecutive month in September, with concerns about job security, price pressures, and the outlook for U.S. business as major drags.
  • Joanne Hsu, director of the consumer survey, said consumers are highly sensitive to tariff policies, with about 60% of respondents spontaneously mentioning tariffs during interviews.
  • Long-term inflation expectations rose to 3.9% from 3.5% last month, and consumers expect inflation of 4.8% over the next 12 months. Several economists noted that import tariffs are having a greater impact on price increases.

In-Depth Analysis

The University of Michigan survey results echo those from the Conference Board and the New York Federal Reserve, both showing that accelerating inflation and a cooling job market are eroding consumer confidence.

"The decline in economic confidence in September exceeded expectations, mainly because Americans are worried about the risk of unemployment," said Heather Long, chief economist at Navy Federal Credit Union, on Friday. "After months of a frozen job market with little hiring outside of healthcare, people are now seeing more industries shift to layoffs," she added in an email.

"U.S. consumers are feeling the pressure from tariffs," Long noted. "They are starting to see price increases on everything from food to furniture to car repairs."

Although consumers are still spending, "they are on edge and ready to tighten their belts if layoffs increase this fall and winter," she said.

In recent weeks, the labor market has flashed several warning signs.

The U.S. Bureau of Labor Statistics announced Tuesday a record downward revision to job growth for the 12 months through March. In a preliminary report, the bureau said payroll growth would likely be revised down by 911,000, or 0.6%.

Additionally, overall U.S. hiring fell in August and the unemployment rate rose to 4.3%, the Labor Department said this month.

The combination of rising inflation and weakening employment presents a complex situation for the Federal Reserve as it pursues its dual mandate of stable prices and maximum employment from Congress.

Policymakers may place persistent inflation concerns above worries about a bleak employment outlook. Market expectations are widespread that the Fed will cut the federal funds rate by 25 basis points at its two-day meeting ending September 17.

Fed Chair Jerome Powell at the post-meeting press conference will likely "cement his shift from focusing on upside risks to inflation to worrying about downside risks to the labor market," BofA Securities economists said in a Friday research note.

Since the price shock from import tariffs could last at least several quarters, the central bank has ample reason to worry that inflation will remain well above the 2% long-term target.

Inflation accelerated last month to its fastest pace this year.

The consumer price index rose 0.4% month over month in August—up 2.9% year over year—after a 0.2% increase in July, the Bureau of Labor Statistics said Thursday.

New car costs rose 0.3% last month, used cars and trucks rose 1%, and prices for clothing and audio-video products each rose 0.5%, highlighting the inflationary impact of import tariffs.

Nevertheless, interest rate futures traders believe the Fed will focus on avoiding mass unemployment. According to the CME FedWatch tool, on Friday they priced in a 79% probability that the central bank will cut rates by at least 75 basis points by December.