American consumers turned noticeably more pessimistic in September, according to a closely watched survey, as worries about inflation and the broader economic outlook deepened.
The University of Michigan's consumer sentiment index slipped to 48.1 this month, down from 51.7 in August and marking the lowest reading in four months. The decline was broad-based, with households reporting worse feelings about both their current financial situation and their expectations for the year ahead.
Joanne Hsu, the survey's director, said interviews with consumers suggest the gloom is widespread, with people across the political spectrum saying the outlook has weakened since the start of the year. That's a notable shift from earlier in 2024, when sentiment had been gradually improving as inflation cooled from its peak.
Inflation expectations move higher
The survey's inflation data help explain the souring mood. Consumers now expect prices to rise 4.6% over the next 12 months, up from 4.0% in August. That's a meaningful jump and a reminder that, despite recent progress on inflation, households still feel the sting of higher costs for everyday goods and services.
Inflation expectations matter beyond just consumer psychology. Economists and policymakers at the Federal Reserve watch them closely because if people expect prices to keep climbing, they may adjust their behavior—demanding higher wages or spending now before prices rise further—which can become self-fulfilling and keep inflation elevated.
The Fed has been wrestling with inflation for over two years, raising interest rates aggressively to cool the economy. While the pace of price increases has slowed from the peaks of 2022, the latest consumer sentiment data suggest that the pain of higher prices is still very much on people's minds.
What this means for investors
For everyday investors, a drop in consumer sentiment is often seen as a warning sign. Consumer spending drives roughly two-thirds of US economic activity, so when households feel worse about their finances, they tend to spend less. That can weigh on corporate earnings and, in turn, on stock prices.
However, sentiment surveys are not always a perfect predictor of actual spending. People may say they feel gloomy but still open their wallets, especially if the job market remains solid. Still, the combination of falling confidence and rising inflation expectations is a red flag that the economy may be losing momentum.
Investors have been on edge lately, with markets reacting to a mix of economic data and central bank signals. The upcoming payrolls and inflation reports will be key tests for the fragile stock market rally. If those numbers show continued strength in the labor market but sticky inflation, the Fed may be forced to keep rates higher for longer, which tends to pressure stock valuations.
The dollar slipped ahead of this data, as traders positioned for the possibility of weaker consumer sentiment. A softer dollar can be a mixed bag for investors: it helps multinational companies that export goods, but it can also signal concerns about the US economy.
Broader context
The US isn't alone in seeing consumer confidence fluctuate. In the UK, for example, consumer confidence hit a two-year high in September, according to GfK, showing that sentiment can vary widely across economies. Meanwhile, in other parts of the world, inflation pressures are also being felt, such as in Latin American markets, where high US yields and Brazil's inflation are creating headwinds.
For US investors, the takeaway is that the consumer remains under pressure. While the labor market has been resilient, with Canada's payrolls rising for a fifth month and wage growth cooling, the US consumer's mood is a crucial indicator to watch in the coming months.
The University of Michigan survey is one of the most widely followed measures of consumer confidence, and its monthly readings are closely tracked by economists and investors. A reading below 50 is historically associated with recessions, so the current level of 48.1 is a cautionary signal.
That said, sentiment can be volatile and may rebound if inflation continues to ease or if the job market stays strong. Investors should keep an eye on upcoming data, including the next inflation report and monthly jobs numbers, to gauge whether the consumer's gloom is translating into weaker spending.
For now, the message from consumers is clear: they're feeling the pinch, and they're not confident that things will improve soon. That's a sentiment that investors will be watching closely as they navigate the rest of the year.
