Consumer Sentiment Falls to Near-Record Lows. Why it’s too Soon to Panic About Spending.

Ring home security cameras are seen during an Amazon product event in New York City in September. (Harly Triballeau / AFP / Getty Images)

Americans are walking into the holiday season feeling decidedly gloomy about the U.S. economy, according to two new consumer surveys released Friday.

Concerns about the continuing government shutdown, weakening labor market, and a potential rise in inflation are weighing on the consumer psyche, the surveys found. The risk is that consumers’ renewed pessimism makes them less inclined to spend over the holidays—but forecasters remain confident that demand will stay strong through the end of the year.

The University of Michigan’s consumer sentiment index fell to a near-record low reading of 50.3 in the first days of November from October’s 53.6, according to preliminary results released Friday. Economists polled by FactSet were expecting the index to increase to 54.2.

“With the federal government shutdown dragging on for over a month, consumers are now expressing worries about potential negative consequences for the economy,” said Joanne Hsu, director of consumer surveys at the University of Michigan.

Meanwhile, the Federal Reserve Bank of New York’s survey of consumer expectations found that consumers’ views of the labor market and their perceptions of their future financial situation both deteriorated in October.

The mean probability that the unemployment rate will be higher one year from now rose by 1.4 percentage points to 42.5%, marking the third consecutive months of increases. Survey respondents also expressed more concerns about the likelihood of finding a new job if they lost their current one.

“Across the economy, segments of the population are increasingly dealing with tighter financial conditions,” said Elizabeth Renter, senior economist at NerdWallet. “That’s certainly true for federal workers and people dependent on food assistance from the federal government. But it’s also likely increasingly true for middle-income Americans.”

The decline in sentiment comes at a bad time for retailers, which are still highly dependent on holiday shopping to drive annual sales and profit growth. The way consumers feel about the economy often augurs their propensity to spend.

That said, these trends haven’t correlated in the postpandemic years.

“While sentiment does matter, over the past few years, we’ve seen consumers spend irrespective of how they’re feeling about things,” said Mark Mathews, chief economist of the National Retail Federation, a trade group. “I personally like to think about the consumer as being sentimentally weak but fundamentally sound.”

Consumer balance sheets are still in a good place, Mathews added, and both real disposable income and wages have grown at a steady pace, giving households confidence to keep spending. A record-breaking bull run and soaring housing prices have also contributed to the resilience in spending, especially for upper-income consumers.

Indeed, the University of Michigan’s consumer sentiment index found that consumers with the largest tercile of stock holdings posted an 11% increase in sentiment. And the New York Fed’s survey found that median household spending expectations for the year ahead inched up 0.1 percentage point to 4.8%.

The NRF expects that retail sales will increase at an annual pace of between 3.7% and 4.2% in the period ranging Nov. 1 through Dec. 31. That translates to between $1.01 trillion to $1.02 trillion in spending.

Inflation expectations were another surprising silver lining in both consumer surveys. The New York Fed’s survey found that median inflation expectations for the year ahead actually dipped by 0.2 percentage points to 3.2%, and were unchanged at 3% for both the three year and five-year time horizon.

Inflation expectations for the year ahead ticked up to 4.7% this month from 4.6% for the Michigan survey, but Hsu notes that the figure is well below May’s readings in the wake of the initial tariff announcements. Longer-run inflation expectations actually declined.

The relatively benign inflation readings reflect how tariff-related price increases have been more muted than previously expected. Last week, Federal Reserve Chair Jerome Powell said that while the new levies have pushed up prices for consumer goods, the Fed expected these increases to be “relatively short-lived” and that inflation expectations remained well-anchored. When stripping out the effect of tariffs, inflation was actually not too far from the Fed’s 2% annual target, Powell added.

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