Labor Market Jitters Take a Toll on Consumer Sentiment, NY Fed Finds

While concerns over the labor market increased, consumers continue to expect their household spending to increase this year. Photo: Michael M. Santiago/Getty Images

The summer’s weak labor market is taking a toll on Americans’ outlook on the economy.

Consumer perceptions on future job prospects and unemployment worsened in August, while short-term inflation expectations ticked higher, according to the Federal Reserve Bank of New York’s latest survey of consumer expectations.

The percentage of people expecting the unemployment rate to be higher a year from now rose by 1.7 percentage points to 39.1% in August from July. Meanwhile, people’s perceived likelihood of finding a job if they lost their current position fell by 5.8 percentage points to 44.9%—the lowest reading since the New York Fed started tracking the measure in June 2013.

The pessimism over the labor market may be warranted. Hiring has been weak since May. In August, the U.S. economy added just 22,000 jobs, well below economists’ projections for a gain of 76,500 jobs. The unemployment rate rose to 4.3%, the highest reading since 2021, while the number of people filing for unemployment rose steadily over the course of August.

“Falling payrolls are a classic sign of economic trouble, even if you could partially hand-wave these latest jobs numbers because of flailing labor supply,” wrote Callie Cox, chief market strategist at Ritholtz Wealth Management, following Friday’s release of the August jobs report. “The story here is simple: only a few industries feel empowered to hire workers right now, and the pressure from tariffs has led to enough job shedding to expose weaker hiring.”

Concerns over tariffs may also be affecting the way consumers think about inflation. Median inflation expectations for the year ahead ticked up by 0.1 percentage points to 3.2%, according to the New York Fed’s survey. They were unchanged at the three- and five-year horizons at 3% and 2.9%, respectively.

While inflation expectations aren’t fluctuating as much as they were earlier in the year, they remain well above the Federal Reserve’s 2% inflation target. Keeping inflation expectations well-anchored is a priority for the central bank, Fed Chair Jerome Powell has said, given that expectations can often act as self-fulfilling prophecies. If consumers believe prices will trend higher, they are more likely to push for salary increases, which in turn could push business costs higher, resulting in what economists call a wage-price spiral.

That said, there was a silver lining in the New York Fed’s survey. Despite more glum outlooks on inflation and the labor market, consumers are still feeling good about their household finances. The median expected growth in household income remained unchanged for the second consecutive month at 2.9%. Perceptions of credit access compared with a year ago improved, with a smaller share of households reporting they find it hard to get credit. Median household spending growth expectations grew by 0.1 percentage point to 5%—a positive sign that Americans are still willing to spend despite the economic uncertainty.

Indeed, consumer spending has remained surprisingly resilient over the course of the past few months, which was one of the main takeaways of the recent consumer earnings season. Walmart CEO Doug McMillon characterized consumer health as “generally consistent” last week in a speech at the Goldman Sachs Global Retailing Conference. People continue to shop for needs, yet are being discerning when it comes to discretionary purchases, he added.

“We’ve seen behavioral change on items that have gone up in cost because of tariffs, where they’re switching from one item to the other,” McMillon said. “Some of the behavioral stuff that you always see during times of pressure. But generally speaking, people have held up really well and we expect the same thing to happen for the balance of the year.”

Write to Sabrina Escobar at sabrina.escobar@barrons.com