Pumping gas at gas pump.
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Consumer sentiment has dropped to record lows, but the economic outlook isn’t too much worse. The measures of consumer attitudes that are frequently cited in news reports have little independent impact on actual behavior. They may, however, draw attention to an important concern.
The Index of Consumer Sentiment, has been published by the University of Michigan since 1952, but has never been as low as the May 2026 level. Both of the major subcomponents, current conditions and expected conditions, fell. However, the other major survey, the Conference Board’s Consumer Confidence measure, was low but not unusually low.
Investopedia describes differences between the two surveys: “Many who watch both numbers say that the Conference Board survey tends to be better at picking up on indicators related to the job market and job security, while the Michigan survey is a better measure of pocketbook issues like the price of gasoline.” In May 2026, employment was fine but gasoline prices soared, causing the sharp drop in Consumer Sentiment but no loss in the Consumer Confidence survey.
Drivers Of Consumer Spending
The most important driver of consumer spending is current income. For working-age people, employment is the major income source, so jobs are very important. Expectations of future income are also important. An example is the effect of cash distributions in the Covid-19 pandemic. Those payments were understood to not be ongoing income, so only a very small fraction of the amounts were spent right away. Many years earlier Milton Friedman wrote that people spend based on “permanent income,” the money they expect to regularly receive in the future. When the risk of unemployment is high, people will be a little more cautious, at least on average.
Wealth—the value of people’s assets—plays a small role through home prices and the stock market.
In my experience as a forecaster, the consumer surveys capture key elements of importance: employment and income, inflation and interest rates. Most of the time the surveys add no further information to what we see when we look directly at those drivers.
The surveys play a useful role with respect to unusual non-economic factors, such as the first Gulf War, 9/11 and the Covid-19 pandemic. The components of the survey also show interesting detail, such as the split in attitudes based on political party, age and region. But for the business leader or investor focused on the aggregate economy in normal times, the surveys add little to our forecast.
Oil Prices And Consumer Attitudes
Oil prices affect the consumer surveys but, more importantly, they affect the economy. Rising prices of gasoline impact consumers, with Consumer Sentiment especially affected. That accounts for the sharp drop in the latest report. In the surveys, rising oil prices are always negative.
In the economy, though, rising oil prices can be good news as well as bad news.
When oil prices rise because of a supply disruption, as happened in 1973 and 1979, the economy worsens. But a price can also rise due to a demand increase. For example, from 2001 to 2008, oil prices rose despite increased global production. Demand was simply rising faster than supply. That price increase was an indicator, but not a cause, of a growing economy.
The current situation in early 2026 is a supply reduction, with oil effectively bottled up in the Persian Gulf.
Economic Indicators For Consumer Spending
Monthly employment in U.S.
Dr. Bill Conerly based on data from Bureau of Labor Statistics
For aggregate consumer spending, income—and thus jobs—are the critical concepts. Employment and income are reported monthly. It’s worthwhile to look at several years of monthly data graphically to identify changes that are one-time blips, as contrasted with on-going trends.
Businesses making or selling products to consumers, both services and physical goods, should begin their own analysis with the distinction between staples and discretionary spending. Staples are the basic food, utilities, and other products that people will continue to buy even in difficult times. Discretionary spending is what people could do without if they had to. But there’s no clear line between the two. Replacing an old pair of jeans might be a staple; buying expensive designer jeans discretionary. Food is necessary for life, but expensive food delivered to the home is discretionary. A statistician cannot easily tell them apart.
A useful split is to separate consumer spending on goods between durables and non-durables. Durables include cars, sporting goods, furniture, etc. Some of these may be staples in the long run, but the purchase in any particular month or year is discretionary.
Some durable goods are sensitive to interest rates, including cars, RVs and boats. For most other goods, interest rates are not an issue.
Inflation feels uncomfortable to consumers, but usually higher prices are accompanied by higher wages. That’s not always true, so inflation-adjusted wages may decline for several months in a row. That usually leads to spending reductions, but not dramatically large ones.
Those who want to look more closely at the data can review my list of economic data sources.
The large drop in consumer sentiment does not, by itself, portend a recession. But it does highlight a significant issue, rising oil prices, that could trigger economic problems in the coming months.
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