Consumer sentiment falls amid debt ceiling standoff

Consumer sentiment fell this month amid mounting concerns that the United States will default on its debt next month, according to May’s University of Michigan Surveys of Consumers

The index for consumer sentiment fell nine percent to 57.7 from 63.5 in April, which erased more than half of the gains the index made after falling to a record low last June. The index for current economic conditions fell 5.4 percent to 64.5 from 68.2 in April. The index of consumer expectations fell 11.7 percent to 53.4 from 60.5 in April. Year-ahead expectations for the economy fell 23 percent from last month as longer-term expectations dropped by 16 percent.

Year-ahead inflation expectations fell slightly to 4.5 percent in May from 4.6 percent in April. After two years of relative stability, long-term inflation expectations increased to their highest reading since 2011, rising to 3.2 percent from 3 percent in April. 

The U.S. faces a potential June 1 deadline to cover its debt payments and raise its current $31 trillion debt ceiling, though Treasury Secretary Janet Yellen has said the date could move to days or weeks later than the estimate.  According to the Associated Press, House Speaker Kevin McCarthy said May 15 that there’s been “no progress” on debt ceiling discussions. He was scheduled to meet the following day with President Joe Biden, who has called on lawmakers to unconditionally raise the borrowing limit. 

“Throughout the current inflationary episode, consumers have shown resilience under strong labor markets, but their anticipation of a recession will lead them to pull back when signs of weakness emerge,” said Surveys of Consumers Director Joanne Hsu. “If policymakers fail to resolve the debt ceiling crisis, these dismal views over the economy will exacerbate the dire economic consequences of default.”