Consumer confidence in the U.S. rebounded sharply in May, interrupting a five-month downward spiral that had raised concerns about potential economic headwinds. The Conference Board’s Consumer Confidence Index jumped to 102.0 this month, up from 97.5 in April, offering a welcome signal that Americans may be feeling more optimistic about their financial prospects.
This uptick comes at a critical moment for the U.S. economy, which has shown remarkable resilience despite persistent inflation and the Federal Reserve’s aggressive interest rate policies. The turnaround suggests consumers may be adapting to the higher-price environment that has defined much of the post-pandemic recovery.
“The improvement was broad-based across all major demographic groups,” noted Dana Peterson, Chief Economist at The Conference Board. “Both the Present Situation and Expectations Indexes improved in May, with the latter rising above the threshold level that often signals recession ahead.”
Behind these improved numbers lies a complex consumer landscape. Americans expressed greater confidence about both current business conditions and the job market – a notable shift given recent volatility in employment data. The percentage of consumers calling business conditions “good” increased to 19.8% from 18.6%, while those labeling conditions as “bad” declined to 17.4% from 19.3%.
The labor market assessment showed similar improvements. Consumers reporting jobs as “plentiful” rose to 39.7% from 38.3%, while those claiming jobs are “hard to get” fell to 14.1% from 16.1%. This shift occurred despite April’s jobs report showing a cooling hiring pace, with employers adding 175,000 positions – solid but below the explosive growth seen earlier.
Federal Reserve officials are likely scrutinizing these confidence numbers as they debate their next moves on interest rates. After holding rates steady at a 23-year high for seven consecutive meetings, policymakers have signaled they need convincing evidence inflation is returning to their 2% target before implementing cuts.
“Consumer confidence numbers provide a window into potential spending behavior,” explains Richard Curtin, former director of the University of Michigan’s consumer sentiment surveys. “When confidence rises, consumers are typically more willing to make large purchases and take on debt – exactly the kind of activity that keeps the economy expanding.”
The expectations component of the index, which reflects consumers’ short-term outlook, saw the most significant improvement, jumping to 86.6 from 80.1 in April. This reading now sits just above the crucial 80 threshold – a level that, when breached on the downside, has historically signaled recession risks.
Inflation expectations also showed modest improvement, with consumers anticipating slower price growth over the next year. The 12-month inflation expectation fell to 5.2% from 5.3% in April, though this remains well above the Federal Reserve’s 2% target and actual inflation readings.
This divergence between perceived and actual inflation has been a persistent feature of the post-pandemic economy. The Consumer Price Index has shown cooling inflation, with April’s report indicating a 3.4% annual increase – down substantially from the 9.1% peak in June 2022. However, consumers continue to express frustration with prices, particularly for everyday essentials.
“There’s often a disconnect between headline inflation statistics and consumer perceptions,” said David Rosenberg, founder of Rosenberg Research. “Americans feel inflation most acutely in frequently purchased items like food, energy and housing – categories that have seen some of the most dramatic price increases.”
The housing market remains a particular pain point, with affordability challenges stemming from both elevated prices and mortgage rates above 7%. The confidence survey showed mixed signals on purchasing intentions, with plans to buy homes and major appliances increasing while intentions to purchase automobiles declined.
Regional variations in confidence were also notable, with the Northeast showing the strongest gains. This aligns with broader economic patterns showing uneven recovery across different parts of the country.
Financial markets responded positively to the confidence data, with stocks gaining ground as investors interpreted the report as evidence the economy remains on solid footing. The S&P 500 added to its already impressive year-to-date gains following the release.
Looking ahead, economists remain cautiously optimistic that consumer sentiment will continue improving as inflation gradually eases and the labor market maintains stability. However, several risk factors could derail this positive momentum, including potential Fed policy errors, geopolitical tensions, and the uncertainty surrounding the upcoming presidential election.
“Consumer confidence tends to be forward-looking,” said Lara Rhame, chief U.S. economist at FS Investments. “The May report suggests Americans are feeling better about the economy’s trajectory, but sentiment remains fragile and subject to rapid shifts based on headlines and personal experiences.”
As summer approaches, economists will be watching closely to see whether this rebound in confidence translates into stronger consumer spending – the primary engine of U.S. economic growth. With pandemic savings largely depleted and credit card balances at record highs, the sustainability of consumer spending remains one of the central questions for the economic outlook in 2024.
