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Why confidence has slipped
Consumer sentiment has fallen as markets corrected and tariff worries resurfaced. The University of Michigan’s index dropped to 57.9 from 79.4 a year ago, approaching its mid-2022 low of 50.0. One driver is a pickup in one-year inflation expectations to 4.9%.
How sentiment ties to spending
Consumers power more than two-thirds of U.S. GDP, so confidence matters. When prices rise – especially due to tariffs that can lift import costs – households often pull back. Historically, tariffs have raised prices on targeted goods (e.g., washing machines following 2018 actions). Even so, recent consumer spending has been surprisingly steady relative to sentiment, reminding us to look beyond any single indicator.
Jobs and wages are a key support
The job market has stayed firm. The unemployment rate is 4.1%, with about 7.7 million job openings—roughly one job per unemployed person – bolstering income and confidence. Tight labor markets can also support wages, which helps offset inflation’s bite.
Savings and debt trends to watch
Households are saving 4.6% of income, still below the 6.2% historical average – evidence that some extra income is being spent rather than saved. Credit card balances reached $1.2 trillion in Q4 2024, but aggregate debt tends to grow with the economy and population; as a share of income, consumer credit has risen yet remains below worrisome levels.
Household wealth is near records
Despite concerns, U.S. household net worth remains near historic peaks, supported by asset prices and real estate. The “wealth effect” can keep spending resilient, though gains are uneven across households and not everyone benefits equally.
What investors can do now
- Revisit risk, not headlines. Align your mix of stocks, bonds, and cash with your time horizon and comfort with volatility.
- Diversify across assets and sectors. Narrow leadership can reverse quickly.
- Focus on the plan. History shows long-term investors who stick to a disciplined strategy are better positioned to meet goals than those who react to every scare.
Key takeaways
- Consumer sentiment fell to 57.9, with 4.9% one-year inflation expectations.
- Spending has held up better than confidence – jobs and wages help.
- Savings rate 4.6% vs. 6.2% historical average; watch debt, but context matters.
- Household net worth is near record highs, supporting the economy despite uneven distribution.
- Don’t overhaul portfolios on short-term sentiment; anchor decisions to your plan.
FAQs
Why does consumer sentiment matter for markets?
Confidence often influences spending on goods and services, which drives corporate revenues and earnings. Persistently low sentiment can slow demand, but it’s only one piece of the broader economic picture.
Do tariffs always mean higher inflation?
Tariffs typically raise prices on affected imports. Companies can absorb costs, negotiate with suppliers, or pass costs to consumers. The overall effect depends on scope and duration.
If savings are low and debt is up, should I cut spending immediately?
Trends show savings below average and higher balances in aggregate, but financial choices should reflect your cash flow, goals, and safety-net needs. A tailored plan beats blanket rules.
Is the strong labor market enough to prevent recession?
No single indicator guarantees an outcome. A firm job market supports income and spending, but investors should still diversify and prepare for a range of scenarios.
How should I respond to a market correction?
Corrections are normal. Review your allocation, rebalance if needed, and keep contributions on schedule. Avoid reactive moves that can lock in losses.
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Disclosure
This material is for informational purposes only and is not intended as investment, tax, or legal advice. Investing involves risk, including possible loss of principal. Consult a qualified professional regarding your personal circumstances.