American consumers were a touch less pessimistic in September than initially reported, but the overall mood remains subdued. The University of Michigan's final consumer sentiment index for the month was revised up to 48.1 from a preliminary 47.8, according to data released Friday. That's still well below August's reading of 51.7, indicating that the recent slide in confidence has not reversed.
The survey, which is released twice a month, is closely watched by economists and investors because it captures both how households feel about their current financial situation and what they expect in the months ahead. The final September figure reflects a modest improvement in the expectations component, which measures consumers' outlook for the economy and their own finances over the next year. However, the current conditions index, which gauges how people view their present situation, remained weak.
Inflation expectations tick higher
Perhaps more concerning for policymakers, the survey showed that households now expect inflation to run at 4.6% over the next year, up from the previous reading. This is a key metric for the Federal Reserve, as inflation expectations can become self-fulfilling: if consumers believe prices will rise faster, they may adjust their behavior, such as demanding higher wages or accelerating purchases, which can feed into actual inflation.
The rise in inflation expectations comes even as overall inflation has cooled from its peaks. The consumer price index has slowed significantly from the 9% year-over-year rate seen in mid-2022, but it remains above the Fed's 2% target. The central bank has been watching these expectations closely as it decides on the path of interest rates.
For everyday investors, the combination of low sentiment and higher inflation expectations is a mixed signal. On one hand, a more confident consumer tends to spend more, which supports corporate earnings and stock prices. On the other, rising inflation expectations could prompt the Fed to keep interest rates higher for longer, which tends to weigh on stock valuations and increase borrowing costs for households and businesses.
What it means for investors
The University of Michigan survey is often seen as a leading indicator of consumer spending, which accounts for about two-thirds of U.S. economic activity. A persistently low reading suggests that households are feeling the pinch from elevated prices and higher borrowing costs, even if the labor market remains relatively strong.
Recent data has been mixed: while some measures of consumer spending have held up, others, such as retail traffic, have shown softness. Retailers have flagged soft foot traffic, and consumer discretionary stocks have been volatile. The sentiment data adds to the picture of a consumer who is still spending but with more caution.
Investors should also note that sentiment can be volatile and is not always a perfect predictor of actual spending. However, the trend matters. The fact that sentiment remains well below its historical average, and that inflation expectations are creeping up, suggests that households are not yet feeling confident about the economy.
The Fed's next policy meeting is scheduled for later this month, and this data will be part of the calculus. Traders have been watching these releases closely, and the dollar has been sensitive to shifts in rate expectations. If inflation expectations continue to rise, the Fed may be less inclined to cut rates soon, which could keep pressure on risk assets.
For now, the takeaway for investors is that the consumer is not out of the woods. While the slight upward revision in sentiment is a positive, the overall level remains low, and inflation expectations are a reminder that the cost-of-living squeeze is far from over. Companies that cater to discretionary spending may continue to face headwinds, while those selling essentials might be more resilient.
As always, it's important to look at the broader economic context. Consumer confidence in other parts of the world has been mixed, and global growth concerns persist. The U.S. consumer remains a key pillar of the global economy, so any sustained weakness could have ripple effects.
In the coming weeks, investors will be watching for more data on jobs, retail sales, and inflation to gauge whether the consumer is truly weakening or just in a rough patch. The University of Michigan survey will be updated again in October, and any further moves in sentiment or inflation expectations will be closely scrutinized.
