The preliminary University of Michigan consumer sentiment index for May fell nearly 10 points to 67.4 after a final 77.2 in April. The index is well below the consensus of 77.0 in the Econoday survey of forecasters. The index is the lowest since 61.3 in November 2023. Consumers are seeing an unwelcome stall in the process of disinflation and are no longer hopeful about a dip in interest rates any time soon. Moderation in the labor market in terms of hiring and wage growth is also damping consumers' confidence.

The index for current conditions is down to 68.8 in May after 79.0 in April and the lowest since 68.3 in November 2023. The expectations index is down to 66.5 in May from 76.0 in the prior month and the lowest since 56.8 in November 2023. Essentially, consumers have lost much of their optimism recovered earlier this year with the realization that prices are not coming down quickly and that various geopolitical crises are going to drag on.

The 1-year inflation expectations measure is up 3 tenths to 3.5 percent in May, the highest since 4.5 percent in November. The 5-year inflation expectations measure is up 1 tenth to 3.1 percent in May, the highest since 3.2 percent in November 2023.

Fed policymakers will not pay too much heed to the increase in the 1-year measure which can be more volatile and influenced by short-term price fluctuations particularly for energy costs. The 5-year measure which is more in line with what policymakers view as the medium term is not much changed and remains in a narrow range hovering around the 3 percent mark for most of the past three years. Inflation expectations remain anchored, but above the pre-pandemic levels. The Fed's credibility as an inflation fighter remains intact even as the underlying pace of inflation is perceived to be higher and above the 2 percent flexible average inflation target.

In the first indication for May, consumer sentiment is expected to hold steady at 77.0 from April's lower-than-expected 77.2. Year-ahead inflation expectations are also expected to hold steady, at April's 3.2 percent level which was higher-than-expected.

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.