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Americans Grow More Pessimistic About Economy as Inflation Concerns Spike

George Cranston profile image
by George Cranston
Americans Grow More Pessimistic About Economy as Inflation Concerns Spike

Consumer sentiment continued its downward trend in March, marking the third consecutive monthly decline. The University of Michigan's consumer sentiment index fell to 57.9 in early March, according to preliminary figures released Friday. This represents a significant drop from February's reading of 64.7 and fell below economists' expectations of 64, according to Barrons reporting.

The decline reflects growing unease about the economic outlook across political lines. "Many consumers cited the high level of uncertainty around policy and other economic factors," said Joanne Hsu, director of consumer surveys at the University of Michigan. She noted that "frequent gyrations in economic policies make it very difficult for consumers to plan for the future."

Inflation expectations showed a worrying uptick in March. Short-term inflation expectations for the year ahead jumped to 4.9% from February's 4.3%, reaching the highest level since November 2022. Long-run inflation expectations surged to 3.9% from 3.5%, marking the largest monthly increase since 1993.

The sentiment decline was universal across political affiliations. Hsu pointed out that "consumers from all three political affiliations are in agreement that the outlook has weakened since February." This rare consensus suggests the economic concerns transcend political viewpoints.

The international trade landscape is adding to economic anxieties. Chinese authorities summoned Walmart executives after the retail giant reportedly asked suppliers to reduce prices to offset Trump's tariffs. The Trump administration recently doubled tariffs on Chinese imports to 20 percent, while China responded with retaliatory measures against US companies and new stimulus plans.

Economists have traditionally viewed consumer sentiment as a forward-looking indicator of spending patterns. The theory suggests that confident consumers spend more, while uncertain consumers tend to save. However, this relationship has weakened over the past five years, with sentiment and spending often moving in opposite directions.

The key question now is whether the current decline in sentiment will actually affect consumer spending. There are early warning signs this might be happening:

  • January retail sales dropped 0.9% from December
  • Retailers reported a soft start to February
  • Delta Air Lines reduced its quarterly revenue projection by $500 million

The recent wave of economic uncertainty linked to policy changes may finally be creating a connection between falling sentiment and reduced spending. While consumer sentiment plummeted during the COVID-19 pandemic and never fully recovered to pre-pandemic levels, consumer spending quickly rebounded and continued growing. The current sentiment decline could produce different results if uncertainty continues to grow.

George Cranston profile image
by George Cranston

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