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Beyond the gloom:

Why May’s consumer sentiment dip may not spell trouble for the US economy

Consumer sentiment in the United States fell more sharply than expected in early May, but economists at ING caution that the slump may not reflect the full picture. According to Chief International Economist James Knightley, the preliminary reading from the University of Michigan was likely distorted by survey timing, which occurred before a major positive shift in global trade relations.

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'We have had a softer-than-expected preliminary May University of Michigan consumer sentiment report, although it is important to point out that most of the interviews were conducted before the China-US trade truce was announced early Monday morning,' Knightley explained. 'That likely explains why the 1Yr ahead inflation expectations jumped up to 7.3% from 6.5% and the 5-10Y expectations hit 4.6%, both well above the readings seen when we actually had soaring inflation in the post-pandemic period.'

The sentiment index dropped 1.4 points to 50.8, falling short of consensus forecasts of 53.4. Both the current conditions and expectations sub-indices contributed to the decline. Analysts attribute this to households' growing concerns over inflation, job market stability, and a recent period of volatility in the equity markets.

'The sense of rapid inflation eating into household spending power coupled with job market angst after a period of equity market falls drove the decline in sentiment to new lows today,' ING stated.

Despite these challenges, recent events may soon provide a lift to sentiment. Equity markets have rebounded in recent weeks, and the de-escalation of US-China trade tensions is likely to support a stronger final sentiment reading later this month.

'Equities have had a strong run in recent weeks and the de-escalation of US-China tensions may mean that the final reading for May, which will be published in a couple of weeks, will be better than this one,' Knightley added.

Nevertheless, consumers are "right to expect higher prices from tariffs," and ING warns that ongoing government spending cuts and a softening labour market will continue to weigh on confidence. The Federal Reserve has suggested that the traditional link between sentiment and spending may be breaking down, but ING's analysis shows the relationship remains intact.

'The Federal Reserve believes that there has been a breakdown in the relationship between sentiment and spending, but the chart below of the Conference Board measure suggests it is still pretty good,' said Knightley. 'Moreover, the scale of the falls in confidence are significant and we would have to say the risks to spending are going to be skewed to the downside for a while.'

In summary, while May's early consumer sentiment figures point to growing anxieties, ING emphasises that timing and recent policy developments could lead to a rebound. However, the broader outlook remains cautious as consumers grapple with inflation and economic uncertainty.

More information:
ING
www.think.ing.com

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