Debt Ceiling Battle Triggers Slide in Consumer Sentiment

The debt ceiling deal didn’t happen soon enough to prevent a decline in consumer confidence.

While President Joe Biden announced Sunday (May 28) an agreement on the budget, the weekslong standoff over the debt ceiling helped cause consumer sentiment to decline, according to the University of Michigan’s Survey of Consumers.

According to the report — released Friday (May 26) — consumer sentiment fell 7% due to worries about the economy, wiping out almost half the gains reached since a record low last June.

This was down to negative economic news — including the debt ceiling crisis — along with ongoing high prices and consumers’ gloomy take on their own finances, said Joanne Hsu, director of the Surveys of Consumers.

“Consumer resilience has been supported by strong incomes thus far. However, high inflation continues to erode consumers’ living standards, and their confidence in the economy remains woefully negative,” Hsu said. “If the debt ceiling is breached, we will not be able to depend on consumer resilience to prop up the economy and avoid the catastrophic economic consequences to follow.”

Earlier this month, the survey showed consumer sentiment at its lowest level since last year, with the people surveyed saying they believed inflation would be 4.5% a year from now. Last month, the one-year-out figure was 4.6%. However, consumers also projected inflation five years from now will be 3.2%, up from 3% in April.

Those numbers dovetail with PYMNTS research from the report “Consumer Inflation Sentiment: The False Appeal of Deal-Chasing Consumers,” which found consumers preparing themselves for inflation to last for a long time. Seven out of 10 grocery shoppers and nearly as many retail customers expect significant price increases in the next 12 months.

The average consumer said they don’t anticipate inflation returning to normal until the end of next year. A normal rate would be at around 2%, the same range as the traditional long-term goal held by the Federal Reserve.

PYMNTS looked at the possible consequences of a default by the government earlier this month, noting that it would make an already bad situation worse.

“Credit has already been drying up in the wake of the collapses of Silicon Valley Bank and other regional banks as 9% of SMBs report more problems securing their last loan than in previous attempts,” that report said. “Any extended debt ceiling debate could not come at a worse time, then, for SMBs seeking loans.”