The University of Michigan consumer sentiment index falls to 57.7 in early May from 63.5 in the final April report. The decline reflects lower sentiment both for current conditions and the six-month expectations. Consumers are likely more worried about the prospect of declining labor market and recession, stubborn inflation, rising borrowing costs, and the failure of Congress to raise the debt limit and avoid a default that would deeply harm the economy and household finances. The May decline erases all the improvement seen in 2023 to-date and is the lowest since 56.8 in November 2022.

The index for current conditions is down 3.7 points to 64.5 in May and its lowest since 59.4 in December 2022. The future conditions index is down 7.1 points to 53.4 and its lowest since 47.3 in July 2022. There is room for an upward revision when the revised final number is released at 10:00 ET on Friday, May 26. That could depend on whether the showdown on raising the debt limit goes right up to the last minute.

Inflation expectations appear generally higher. While the one-year inflation expectations measure dips a tenth to 4.5 percent in early May compared to the 4.6 percent in April, these remain the highest readings since 4.9 percent in November 2022, although below the near-term peak of 5.4 percent in March and April 2022. The 5-year inflation expectations measure which is better matched to the Fed's terminology for the"medium-term" is up 2 tenths to 3.2 percent in early May and is the highest since 3.2 percent in August 2008. While it isn't enough to talk about inflation expectations coming unanchored, it is enough to say that consumers anticipate price increases are not going away any time soon.

The disappointing sentiment results leave Econoday's Consensus Divergence Index at minus 12 overall and at minus 15 excluding prices, back below the zeroline where the readings spent the whole of April.

Consumer sentiment in the first indication for May, which in April fell 1.5 points to 63.5, is expected to fall another half point to 63.0.

The University of Michigan's Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

This balance was achieved through much of the nineties and, in large part because of this, investors in the stock and bond markets enjoyed huge gains. It was during the late nineties that the consumer sentiment index hit its historic peak, reaching levels that were never matched during the subsequent 2001 to 2007 expansion nor during the long expansion following the Great Recession.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.