Americans don’t buy ‘strong economy’ narrative as confidence plunges to 7-month low

There's an alarming discrepancy between how economists and ordinary Americans view the economy, new data shows.

According to the University of Michigan, the consumer sentiment index plunged from 69.1 in May to 65.6 in June. It was the lowest reading since November and well below the 72 economists forecasted.

Americans’ assessment of current conditions posted an even bigger drop, suggesting that recent gains in the job market and a slight moderation in inflation weren’t helping.

“Assessments of personal finances dipped due to modestly rising concerns over high prices as well as weakening incomes,” said Joanne Hsu, who heads the Michigan survey.

The survey’s pessimistic tone was partly due to concerns that inflation will persist for the foreseeable future. By mid-June, Americans predicted inflation to hover around 3.3% by year-end and 3.1% in the long run.

“While lower-income families have, as a group, seen notable wage gains in a strong labor market, their budgets remain tight amid continued high prices even as inflation has slowed,” Hsu said, adding that middle-income consumers are roughly in the same boat.

Americans' pessimism spells trouble for the U.S. economy, which largely relies on consumer spending to maintain its growth and job creation.

The health of the American consumer in question

Experts say there are plenty of signs that the American consumer is running out of steam—thanks to declining disposable incomes, elevated costs, and fewer savings to tap into.

For example, real disposable income growth—a major driver of spending—grew just 1% in the 12 months through April. And while job creation remains positive for now, the momentum is waning.

This reality “will continue to limit income growth and push more families to exercise spending restraint amid reduced savings buffers and higher debt burdens,” said Gregory Daco, chief economist at EY.

“Factoring increased price sensitivity, household spending momentum will gradually cool,” he explained.

Meanwhile, major retailers such as Best Buy, Target, and Home Depot have all reported declining sales of discretionary goods. Best Buy has even noticed shoppers are switching to cheaper brands.

McKinsey analysts, including Becca Coggins, Christina Adams, Kari Alldredge, and Warren Teichner, said consumer spending isn’t expected to fall off a cliff, but that there’s clear evidence of “contradictory behavior” that showed up in the second quarter.

On the one hand, consumers “continued to splurge on food and apparel, but they pared back spending in other areas,” the analysts wrote.