Eyes on the Economy: Sentiment, Unemployment, Inflation

Consumer Sentiment Hits Record Low

The University of Michigan’s Consumer Sentiment Index fell to a record low of 48.2 in early May, missing expectations and slipping below April’s 49.8, comparable to the levels last seen in mid-2022. While future expectations edged slightly higher, current conditions dropped roughly 9%, reflecting rising concerns over high prices and deteriorating buying conditions for major purchases. Consumers increasingly cited gasoline costs and tariffs as key pressures, underscoring the ongoing strain from elevated living expenses. Real income expectations have continued to decline since March, signaling weakening household confidence. 

Geopolitical tensions in the Middle East, particularly disruptions affecting energy supply, are unlikely to improve sentiment until fuel prices stabilize. Inflation expectations remain elevated despite a slight ease: One-year inflation expectations dipped to 4.5% from 4.7% but remain well above pre-war and pre-pandemic levels. Long-run expectations edged down to 3.4%, still exceeding recent historical norms. Overall, persistent cost pressures, especially energy related, continue to weigh heavily on consumer outlook.

Unemployment Rate Holds Steady

The U.S. economy added 115,000 jobs in April, following an upwardly revised gain of 185,000 in March and far exceeding expectations of 62,000. Hiring was led by healthcare, transportation and warehousing and retail trade. However, job losses continued in the federal government, information and manufacturing.

Despite solid headline job growth, underlying labor market indicators weakened. The unemployment rate held steady at 4.3%, but the number of unemployed rose by 134,000 to 7.37 million. Total employment declined by 226,000 to 162.6 million, while the labor force shrank by 92,000 to 170 million. As a result, the labor force participation rate slipped to 61.8%, its lowest level since October 2021.

The employment-population ratio edged down to 59.1%, marking a four-year low. Meanwhile, the broader U-6 unemployment rate, which captures underemployment and discouraged workers, increased to 8.2%, highlighting growing slack beneath the surface of the labor market. 

Inflation Reaccelerates as Iran War Fuels Energy Prices

U.S. consumer prices rose 3.8% in April from a year earlier, exceeding expectations and marking the fastest increase in three years, largely driven by surging energy costs tied to the war with Iran. Gasoline prices jumped 28% and fuel oil surged 54%, contributing to an 17.9% annual rise in overall energy prices. On a monthly basis, prices climbed 0.6%, with energy accounting for more than 40% of the increase. Food and shelter also increased at annual rates of 3.2% and 3.3%, respectively. Core inflation, which excludes food and energy, rose 2.8%, slightly above forecasts. 

Inflation remains a major concern for consumers, especially as everyday essentials like gas and coffee continue to rise. While earlier tariffs are still gradually affecting prices, economists point to the Iran conflict as a faster, more immediate shock. Some warn inflation could reach 4% later this year, creating challenges for household budgets.

Meanwhile, the Federal Reserve’s outlook has shifted. With the labor market stabilizing and inflation reaccelerating, expectations for rate cuts have faded. Some policymakers are now weighing whether future rate hikes may be necessary, depending largely on whether energy markets normalize. 

Inflation Reaccelerates Amidst Iran War

_{Source: Bureau of Labor Statistics.}