Americans are exhibiting a growing sense of pessimism regarding the U.S. economy, as the ongoing conflict with Iran continues to unsettle markets, with sentiment declining across all income brackets—even among the wealthiest segments.
Consumer sentiment dropped by 6% this month, settling at a final index reading of 53.3, as reported by the University of Michigan on Friday. This marks a steeper decline than initially observed at the start of the conflict earlier this month. Sentiment now sits at its lowest point since December. The figure reported Friday fell short of the 54.2 consensus economists had projected in a FactSet survey.
The Middle Eastern confrontation has driven up global energy prices over the past month, sending major U.S. stock indices into a tailspin as investors anxiously await any signal that the conflict might soon conclude. President Donald Trump maintains that his administration is engaged in diplomatic talks with Iran.
“Declines were observed across age and political party lines,” stated Survey Director Joanne Hsu in a release. “Middle- and high-income consumers, along with those holding significant stock wealth, experienced a particularly noticeable dip in sentiment, facing both higher gasoline prices and financial market volatility stemming from the conflict in Iran.”
An extended conflict carries the dual risk of fueling inflation while simultaneously pushing the U.S. economy toward a recession. Gasoline prices across America have already spiked notably since the conflict began.
Americans’ inflation expectations for the coming year registered their largest monthly increase in roughly a year, rising to 3.8% from 3.4% in February, a figure that exceeds expectations for 2024.
However, survey respondents do not anticipate this war-induced higher inflation to persist over the longer haul of five to ten years, with long-term inflation expectations actually ticking down slightly this month to 3.2%.
“Consumers may not foresee the recent negative developments persisting indefinitely into the future,” Hsu commented. “That said, these views could shift if the Iranian conflict drags on or if sustained energy price hikes translate into broader inflation.”
This is welcome news for Federal Reserve policymakers, who closely monitor public price perceptions, particularly over the long term. Long-term inflation expectations serve as an indicator of American confidence in the Fed’s ability to keep price increases in check. The Fed targets 2% annual inflation as measured by the personal consumption expenditures price index, which stood at 2.8% as of January.
What Declining Sentiment Means for the Economy
A dip in consumer sentiment has not necessarily resulted in a reduction in spending in recent years.
When sentiment plummeted sharply following the pandemic—for instance, in 2022 when inflation hit a 40-year peak, or in 2023 amid the Congressional standoff over the federal debt ceiling—Americans generally kept their wallets open.
Consumer expenditures, which constitute roughly two-thirds of the U.S. economy, are more sensitive to the state of the labor market; specifically, whether the rate of layoffs is increasing beyond historical norms. While job growth has been modest over the past year, new unemployment insurance claims remain at historically low levels. Furthermore, wage growth has outpaced inflation since the middle of 2023.
This implies that Americans still possess the means to continue spending—until they stop feeling secure. A sudden surge in layoffs, coupled with a more difficult job market to enter, would likely prompt Americans to pull back on expenditures.
And for that matter, spending in recent months has already been on the weaker side. Retail sales, a significant component of overall spending, contracted by 0.2% in January following a flat December reading. The brutal cold weather likely suppressed spending during January.
Should the Iran conflict stretch on for several months, the outlook could quickly sour, potentially initiating a downward economic spiral where falling asset prices give way to weakening consumer spending and, eventually, recession.
“In a K-shaped economy, what affects the top segment can disseminate rapidly,” noted Heather Long, Chief Economist at Navy Federal Credit Union, in commentary released on Friday.
About the Author
