Rising Consumer Confidence in May Signals Potential Inflation Concerns


The Conference Board’s monthly measure of consumer confidence indicates a boost in the economy for May. Confidence increased for the first time in four months, contrary to expectations of another decline, as per Tuesday’s report.

Dana Peterson, the chief economist at the Conference Board, notes that the robust labor market has positively impacted consumers’ assessment of current conditions. Although the percentage of consumers who believe jobs are plentiful dropped to 37.5 percent from 38.4 percent, this was outweighed by a larger decrease to 13.5 percent from 15.5 percent in those who think jobs are hard to get.

“Confidence has improved among consumers of all age groups compared to last month. Those with incomes over $100K showed the largest rise in confidence. On a six-month moving average basis, confidence is still highest among the youngest consumers (under 35) and the wealthiest (making over $100K),” Peterson says.

PMIs and Claims Show Signs of Acceleration

This follows last week’s preliminary purchasing managers indexes (PMI) from S&P Global, indicating an unexpected surge in activity and a revival in manufacturing. The surveys show business activity speeding up to its fastest pace in two years in May. This growth was primarily driven by the service sector, which reported the largest output increase in a year, while manufacturing also experienced stronger growth.

“The US economic upturn accelerated again after two months of slower growth, with early PMI data indicating the fastest expansion in over two years in May. The data suggest the US economy is set for another solid GDP gain in the second quarter,” wrote Chris Williamson of S&P Global last week.

Initial jobless claims data also tell a similar story. Claims surged to 232,000 in the week ending May 4 due to some unresolved seasonality around school spring breaks. However, since then, claims have decreased to 223,000 the following week and 215,000 last week. The labor market appears very strong.

(Photo: Ümit Yıldırım/Unsplash)

The overall narrative from these real-time economic reports is one of resurgent growth after some sluggishness in March and April. If confirmed by the hard data—which won’t be available until June and July—this could be enough for the Fed to hold off on further actions for the rest of the year. Even with the current soft data, it seems unlikely that the Fed would be confident enough to consider cuts in July or September.

Don’t Worry That Consumer Sentiment Sank

What about last week’s report on consumer sentiment from the University of Michigan? It showed a decline in consumer sentiment in May, seemingly contradicting the positive PMI, jobless claims, and confidence reports. However, this discrepancy might not be as significant as it appears.

Firstly, the final reading for the University of Michigan consumer sentiment metric was better than the mid-month, indicating some improvement as the month progressed. Furthermore, the University of Michigan survey tends to be more affected by inflation expectations and challenges small businesses face due to rising costs and labor shortages. Thus, factors that might lower the consumer sentiment figure could actually be signs of an inflationary acceleration.

Importantly, both the University of Michigan and Conference Board measures showed an increase in inflation expectations. This is something that Fed officials are likely to pay close attention to in their mid-June meeting.

We’ll gain a clearer understanding of May’s economic conditions when the Department of Labor releases the nonfarm payrolls report next week. A strong report would likely quash any hopes for a July rate cut and possibly even reduce the chances of a September cut.

John Carney
John Carney
Before I became a journalist, I practiced law at Skadden Arps and Latham & Watkins.

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