Consumer sentiment bottoms out

Consumer Sentiment Bottoms Out: A Telling Sign of Economic Strain

By Steven Orlowski, CFP, CNPR

In recent months, consumer sentiment has taken a dramatic dive, hitting its lowest point in years. According to the latest data from the University of Michigan’s Index of Consumer Sentiment, American households are feeling more pessimistic about the economy than at any point since the height of the pandemic — and in some respects, even worse.

This historic low in consumer confidence reflects a convergence of factors that are squeezing household budgets and shaking public trust in the economy. Despite low unemployment and resilient job growth, inflation remains stubborn in key areas like housing, food, and energy. Interest rates, held high by the Federal Reserve to combat inflation, have pushed borrowing costs to levels not seen in decades, making homebuying, auto loans, and credit card debt significantly more burdensome.

What’s Driving the Decline?

One of the key drivers of waning sentiment is the perception that prices are no longer stabilizing. While the overall rate of inflation has cooled compared to its 2022 peak, many consumers report feeling that the cost of everyday essentials — groceries, rent, insurance — continues to rise faster than their wages. This has led to a sentiment disconnect: economists see cooling inflation, but the average consumer still feels inflation’s sting at the checkout line.

Additionally, geopolitical tensions and a looming sense of uncertainty — from political gridlock in Washington to global conflicts in Europe and the Middle East — have amplified a general feeling of economic insecurity. Consumers are not just worried about today’s prices; they’re uncertain about what tomorrow might bring.

A Recessionary Signal?

Historically, sharp declines in consumer sentiment have preceded economic slowdowns. When consumers feel pessimistic, they tend to cut back on discretionary spending — and consumer spending accounts for roughly 70% of U.S. economic activity. Retail sales have already shown signs of softening, and corporate earnings reports have begun to reflect a more cautious consumer.

However, economists remain divided on whether this marks the beginning of a recession or simply a psychological adjustment to a new economic reality. Some point to the strength of the labor market as a buffer, while others warn that cracks are beginning to form, especially among lower-income households.

What Comes Next?

The Federal Reserve finds itself in a delicate balancing act. Lowering interest rates too soon could reignite inflation, while keeping them high risks choking off consumer spending entirely. Markets are watching closely for any sign that the Fed will pivot toward easing in the coming months — a move that could help lift consumer spirits.

In the meantime, businesses may need to brace for a period of cautious consumer behavior. Value-oriented strategies, promotional pricing, and enhanced customer engagement will likely become more important as households tighten their belts.

For now, the message from Main Street is clear: optimism has given way to anxiety. And until consumers begin to feel relief where it matters most — in their wallets — sentiment may remain at the bottom for some time to come.

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