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Consumers appear concerned about the political standoff over the debt ceiling now underway in Washington, prompting a sharp drop in sentiment in May, according to the preliminary estimate from the University of Michigan released on Friday.
The overall index fell 9.1% to 57.7 from April’s reading of 63.5. That was way below expectations of a small decline. The current conditions index fell to 64.5 from April’s 68.2 while the expectations index fell to 53.4 from 63.5, an 11.7% drop.
“While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff,” said survey director Joanne Hsu. “But with the job market remaining strong and incomes rising, albeit faced with inflation, consumers have maintained their spending habits.”
The mood of consumers has fluctuated in recent months, along with progress on inflation and concerns about a slowing economy and possible recession. Recent worries about the debt ceiling standoff in Congress have also contributed to consumer angst.
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Indeed, a separate take on consumer sentiment from the data firm Morning Consult found an uptick in the mood of Americans last month.
“In the United States, consumer sentiment regained its footing in April after what proved to be a temporary wane following March’s banking sector crisis,” according to the latest release of Morning Consult’s Index of Consumer Sentiment.
“Recent momentum has been driven primarily by rising confidence at the higher end of the income spectrum,” the report said. “Since the start of the year, consumer sentiment has shot up 17.3% among U.S. adults from households earning $100,000 or more annually and 7.9% among those earning between $50,000 and $99,999. On the other hand, confidence has fallen 2.7% among adults earning less than $50,000.”
The White House and Republicans in Congress are currently squabbling over raising the $31.4 trillion debt limit and are facing a deadline of as early as next month at which point the government will run out of money to pay its bills.
The House passed a bill that would extend the debt ceiling in exchange for a wide swath of spending cuts, but President Joe Biden has said he wants a clean bill and then negotiations over future budgets. Biden met with a group of bipartisan lawmakers on Tuesday but a meeting scheduled for Friday was canceled, reportedly as staff for both sides were continuing talks.
Absent a deal, the government faces the unprecedented fate of a default on its debt. Business leaders and Wall Street executives have called for action and the bond market has shown considerable volatility in recent weeks with short-term debt yields higher than those on longer-duration bonds, the opposite of what is normally the case.
In the case of any default, even a short one, markets would likely sell off and payments from the Treasury would be curtailed, or prioritized, causing havoc and undermining consumer confidence.
“Consumers are becoming increasingly concerned about the labor market, the banking sector, and the unknown impacts from the debt ceiling debacle,” said Jeffrey Roach, chief economist at LPL Financial. “The consumer will likely pull back spending in the coming months and as spending slows, inflation should materially recede by the end of this year.”
Ironically, the economy has shown some positives of late, with the job market remaining strong and the unemployment rate falling to a level not seen since 1969, while the rate of inflation is also steadily declining.
A recent poll from Yahoo New/YouGov found that more Americans now favor “raising the U.S. debt limit” (40%) than not raising it (35%) – a reversal from January, when more were opposed (40%) than in favor (28%).
“If policymakers fail to resolve the debt ceiling crisis, these dismal views over the economy will exacerbate the dire economic consequences of default,” Michigan’s Hsu said.