At a Glance

  • Consumer sentiment held at its lowest level since May in October, as concerns over high prices and a dim labor market outlook weighed on households, data from the University of Michigan showed on Friday.
  • The consumer sentiment index edged down to 55 in October from 55.1 in September, with respondents more pessimistic about their personal future finances and conditions for buying durable goods. The survey concluded on October 6.
  • "High prices and concerns over weak employment prospects remain central to consumers' minds," Joanne Hsu, director of the University of Michigan's Surveys of Consumers, said in a statement. "Consumers do not perceive these factors as likely to improve substantially."

In-Depth Analysis

The University of Michigan's findings align with a recent survey by the Federal Reserve Bank of New York, which showed consumers' pessimism over price pressures and the job market intensifying.

"Although the expected job finding rate picked up slightly, labor market expectations continued to deteriorate, with consumers reporting lower expected income growth, higher expected unemployment, and a greater perceived likelihood of a rise in the overall unemployment rate," the New York Fed said in a statement.

Additionally, data from the New York Fed released on Tuesday showed that one-year inflation expectations rose to 3.4% in September (surveyed through September 30) from 3.2% the previous month, while five-year inflation expectations increased to 3% from 2.9%.

Weak hiring conditions prompted the Federal Reserve to cut its key interest rate by 25 basis points last month, marking the first monetary easing of the year.

The unemployment rate rose 0.1 percentage point to 4.3% in August, partly due to rising joblessness among more vulnerable workers, such as those in their 20s, in recent months. According to Fed data, the unemployment rate for Black workers, after falling to historic lows in 2023, has now risen to its highest level since the pandemic.

Given the softening labor market, central bank officials' median projections last month indicated they would cut rates by 25 basis points twice more by year-end, from the current range of 4% to 4.25%.

"We need to be prepared for the possibility that labor market softening could turn into something worse, especially if demand suffers another adverse shock," Fed Governor Michael Barr said on Thursday, noting that stricter immigration controls this year have reduced labor supply by about 1 million people.

However, Barr said in his speech that, like consumers, policymakers are equally concerned about inflation.

Barr said the Fed's congressional mandate to ensure price stability is "at significant risk," noting that tariffs could keep price pressures elevated for longer than many economists expect.

"Although inflation has fallen considerably since 2021, it remains above our 2% target and is currently moving up," he said.

"Fed officials are in a tough spot right now because risks are rising on both sides of the FOMC's dual mandate—employment and inflation," he said. "I agree with Chair (Jerome) Powell's succinct point: there is no risk-free path forward for monetary policy."