A few days ago, the University of Michigan released its final reading for the Consumer Sentiment Index through May. The measure matched the prior month’s reading of 52.2 but remains well below the 71.7 reading we saw in January. The Conference Board’s own release of the Consumer Confidence clocked in at a very high 98, up from the April reading of 85.7 but down from January’s 104. Why are these indices so important to follow, and what are they telling us?
Consumer spending accounts for nearly 70% of the US gross domestic product, the largest component of our economy by far. How consumers feel about the economy, their future spending plans and their future job opportunities has a major impact on the nation’s current and future GDP. In turn, these data can have a significant impact on business investment, inflation, interest rates, and the stock market.
The University of Michigan Consumer Sentiment Index is a survey of 500 households done twice a month. The survey focuses on current conditions and current personal financial situations. In contrast, the Conference Board’s Consumer Confidence Index is based on a monthly survey of 5,000 households, categorized by age and income. The questions asked are designed to elicit granular responses; for example, a recent survey showed that respondents under the age of 55 had a less optimistic economic outlook than their older cohort. This data can be of great value to both economists trying to forecast business conditions and marketers trying to position advertising and inventory.
Here is where the influence on financial markets comes in. Changes in consumer confidence or sentiment presage changes in consumer spending habits. This will, in turn, influence business investment, which affects corporate profits and stock prices (which reflect the direction and level of profitability). Changes in expected consumer spending, especially on big ticket items like houses, can affect both inflation and interest rates. The Federal Reserve may look to reduce interest rates in a low confidence period to stimulate demand or nudge up rates in a time of overly optimistic expectations.
The chart below illustrates the relationship between U.S. economic recessions (represented by grey vertical bars) and declines in consumer sentiment. In most cases, sentiment falls just before an official recession sets in. Also, notice that the May 2025 data shows weakening sentiment.
In periods of uncertainty, measures like the Consumer Confidence Index and the Consumer Sentiment Index become highly valuable tools for financial analysts. It can help paint a picture of the near future and enhance our forecasting abilities.
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