Following April’s record one-month decline, consumer confidence inched upward in May by an insignificant amount, according to the University of Michigan Surveys of Consumers.

The Sentiment Index fell 27.7% below last May’s level, with the falloff in evaluations of current conditions and future prospects posting declines of 25%-30%. The CARES relief checks and higher unemployment payments have helped to stem economic hardship, but those programs have not acted to stimulate discretionary spending due to uncertainty about the future course of the pandemic, said U-M economist Richard Curtin, director of the surveys.

The impact of steep price discounting and low interest rates have helped to improve buying plans but have been offset by continued high levels of job and income uncertainty, he said.

“Consumers were more positive in May about several aspects of the economy. After the record economic plunge and staggering surge in unemployment, it is not surprising that consumers expected both to improve,” Curtin said. “Consumers quickly added that the economy and labor markets would remain distressed, but would notch some gains in late 2020 and early 2021.

“This reaction has occurred near the end of every recession since World War II. Second, the May gain does not signal a cyclical low since the pandemic is hardly over and still represents the dominant risk. Moreover, the recession’s severity means that many jobs and firms will never reemerge.”

Economy Expected to Improve but Still Remain Unfavorable
A majority of consumers expected the economy to improve from its recent standstill, and a majority of consumers still thought that overall conditions in the economy would remain unfavorable despite those small gains.

Expectations for renewed economic growth have always dominated at the ends of recessions and more favorable assessments of the current state of the economy near the ends of expansions, Curtin said. An even larger gap between growth prospects and current conditions will likely result when the dismal 2nd-quarter GDP news is released, he said.

Job and Income Uncertainty Widespread
The proportion reporting improved finances in the May survey was 20 percentage points below the February reading. The falloff was due to declines in net income gains, reported by just 10% of all consumers in May, down from 32% three months ago, Curtin said.

Expected income gains during the year ahead fell to just 0.5% in May from 2.2% three months ago. Surprisingly, the largest declines were reported by those with incomes in the top third, who expected income gains of just 0.4% in both April and May, well below January’s 3.0%, Curtin said. When asked to identify the most important changes in the national economy, an all-time record number of consumers cited extraordinary increases in the unemployment rate.

Consumer Sentiment Index
The Consumer Sentiment Index was 72.3 in the May 2020 survey, just above last month’s 71.8 but well below last year’s 100.0. The Expectations Index fell to 65.9 in May from 70.1 in April and 93.5 in last May’s survey. The Current Conditions Index was 82.3 in May 2020, up from 74.3 in April, but significantly below last May’s 110.0.

Consumer sentiment has remained largely unchanged during the past two months, with the final May estimate just a half index point above the April reading. The CARES relief checks and higher unemployment payments have helped to stem economic hardship, but those programs have not acted to stimulate discretionary spending due to uncertainty about the future course of the pandemic. It should not be surprising that a growing number of consumers expected the economy to improve from its recent standstill, or that the majority still thought conditions in the economy would remain unfavorable in the year ahead. This has been a common occurrence in past cycles (see the chart). Expectations for economic growth have always dominated at the ends of recessions, and favorable assessments about the current state of the economy are more frequent near the ends of expansions. The gap between economic growth and the current performance of the economy is likely to grow significantly when the disastrous 2nd quarter GDP is announced. More widespread price discounting as well as low interest rates have helped to improve buying plans, but those plans still remain well below the levels recorded three months ago. Adding to consumers' concerns about a significant expected drop in income growth, year-ahead inflation expectations rose sharply, putting extra pressure on consumers' abilities to maintain their living standards.