Key Takeaways:
American consumers grew more pessimistic in May as the inflationary effects of the Middle East war eroded confidence in the economic outlook.
The Conference Board said Tuesday its consumer confidence index fell to 93.1 in May from an upwardly revised 93.8 in April, as intensifying conflict in the Middle East pushed energy costs higher and darkened households' view of business and labor-market conditions. The reading came in above the 92.0 consensus estimate from economists polled by The Wall Street Journal.
"The persistent impact of higher energy prices is weighing on how consumers view the economy, particularly their assessment of current business and labor conditions," said Dana Peterson, chief economist at The Conference Board. "While the expectations component edged higher, the overall trend suggests households are bracing for continued price pressure."
The present situation index, which measures consumers' assessment of current business and labor-market conditions, fell 3.2 points to 121.2 in May. The expectations index, based on the short-term outlook for income, business and labor-market conditions, rose one point to 74.4 — though readings below 80 have historically signaled a recession within the next year. The labor market differential, tracking the share of consumers who say jobs are plentiful minus those who say jobs are hard to get, narrowed 0.6 percentage points to 6.9.
The deterioration comes as the war in the Middle East, which began Feb. 28, ripples through global supply chains and energy markets. Brent crude has remained elevated, pushing U.S. gasoline prices higher and squeezing household budgets. A separate survey from the University of Michigan reported consumer sentiment fell to a record low in May as perceptions of future inflation worsened. The 30-year fixed mortgage rate climbed to 6.51% in the week ending May 21, Freddie Mac data show, up from 6.36% a week earlier, adding pressure on the housing sector.
The Inflation Feedback Loop
The consumer confidence data arrives ahead of Thursday's release of the personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge. Economists expect the April PCE reading to show persistent price pressures, complicating the central bank's path toward rate cuts. The Fed has held its benchmark rate at 4.25% to 4.5% since March, when it delivered its first cut of the cycle, and markets have since pared expectations for additional easing as inflation data has remained sticky.
The pattern extends beyond the U.S. The European Central Bank's latest quarterly survey of euro area firms showed selling price expectations rose to 3.5% from 2.9% before the conflict began, while one-year inflation expectations climbed to 3% from 2.5%. The ECB now projects 2026 headline inflation at 2.6%, with a second-quarter spike to 3.1%, and has cut its euro area GDP growth forecast to 0.9%. In emerging markets, Sri Lanka's central bank raised its benchmark rate by a full percentage point to combat inflation pressures.
What's at Stake for Markets
Weaker consumer confidence signals reduced household spending, which accounts for roughly two-thirds of U.S. economic output. If the PCE data due Thursday confirms sticky inflation alongside slowing growth, the narrative of a stagflationary environment could strengthen, weighing on equity markets and boosting demand for safe-haven assets. The S&P 500 has already pulled back from its March highs as rate-cut expectations have been pushed later into the year. OIS markets currently price a roughly 45% probability of a cut at the Fed's June meeting, down from 70% a month ago.
The Conference Board's data suggests the consumer, long the bedrock of the U.S. expansion, is showing cracks — and the war in the Middle East is widening them. With the next Fed decision on June 17-18, Thursday's PCE print will be the last major inflation data point before policymakers set rates.
This article is for informational purposes only and does not constitute investment advice.
