Economic Report: Consumer sentiment tumbles to six-month low in May on renewed fears about U.S. economy

Americans view on near-term inflation moderated slightly in May. They now expect the inflation rate in the next year to average about 4.5%. Inflation expectations had surged to 4.6% in April from 3.6 in March.

Inflation expectations over the next five years rose to 3.2% from 3% in April. That’s the highest reading since 2011.

Key details: A gauge that measures what consumers think about their financial situation — and the current health of the economy — fell to 64.5 from 68.2 in April.

Another measure that asks about expectations for the next six months moved down to 53.4 in May from 60.5 in the prior month.

Big picture: Consumer spending is the engine of the economy. If households grow concerned about the outlook and pull back, it could push the economy into recession.

And Federal Reserve officials won’t be pleased to see expectations of inflation over the long-term increase. They view expectations as a key source of future inflation pressure.

What UMich said: “Consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff,” the press release said. In the most serious debt-ceiling standoff in 2011 consumer sentiment plummeted to recession levels but recovered quickly when the crisis was averted.

What are they saying? “While we don’t place too much weight on the relationship, if sustained, the latest plunge in consumer sentiment would be consistent with falling consumption in the second quarter. That would be alongside the probable hit to consumption from tightening credit conditions,” said Olivia Cross, assistant economist at Capital Economics.

Market reaction: Stocks
DJIA,
-0.24%

SPX,
-0.27%
were lower in volatile trading on Friday while the yield on the 10-year Treasury note
TMUBMUSD10Y,
3.433%
rose to 3.41%.