Americans brace for a slowdown as consumer confidence slips

CAROLINE WOODS:Joining me now is Joanne Hsu, director of the surveys of consumers at the University of Michigan. Joanne, Thanks so much for being here.

JOANNE HSU: It's a pleasure to be here.

CAROLINE WOODS: So Joanne, sentiment ticked down to 58.2 in August, which was slightly below expectations. Tell us what is the takeaway about the consumer with the reading of 58.2?

JOANNE HSU: The main thing that's on consumers' minds right now is high prices and the threat of inflation going forward. And that picked up in August, primarily because of tariff policy developments kind of escalated this month. Consumers are not necessarily expecting the worst case scenario that they have been bracing for in April and May, in the wake of the reciprocal tariff announcements. But still, they're expecting the continued uncertainty around tariff policy and the high tariffs that are currently in place to lead to a resurgence of inflation going forward. And they're also expecting unemployment rates to rise in the year ahead.

CAROLINE WOODS: So how would you actually classify the consumer right now? Still confident but cautious?

JOANNE HSU: I would say they are broadly quite wary about the future. They are. We saw a deterioration in expectations on a number of fronts this month. We saw deterioration in expectations for business conditions, unemployment, inflation, income expectations firmed up just a little bit, but they're still pretty subdued compared to six months ago or a year ago. So consumers aren't really feeling that confident at all. They're not feeling as bad as they were in April, but they're really bracing for a slowdown.

CAROLINE WOODS: How closely does sentiment align with actual consumer spending behavior, though. Because we also saw today's personal income and spending report was reflective of a consumer that's holding up quite well. So why is there this disconnect?

JOANNE HSU: So historically speaking, we've been collecting data on sentiment since 1946. Typically when people don't feel confident, they tend to pull back their spending. And when they feel confident, they're more likely to spend. And I actually think today this morning spending report bears that out because that reflects spending in July. And in July, we had a pretty big jump in sentiment compared to April and May. And it's they gained some confidence over the summer when tariff policy announcements slowed down a bit. But August is a different story. Things started to pick up.

Furthermore, it is true that after the pandemic, people felt really had really poor levels of sentiment, but they were willing to spend through it. That's because labor markets were really strong at that time. And they had very, very reliable incomes. People who wanted a job could get a job. And so even though they didn't feel good about the high inflation they were seeing, they didn't feel good about the economy. They had the income to support continued spending.

And when we look at about 2/3 of consumers, they expect unemployment to rise in the year ahead. Their income expectations are not strong right now. So that support that we have for post-pandemic spending just isn't there right now.

CAROLINE WOODS: Yeah and we've heard this for quite some time. Consumers say the economy feels worse than the data actually shows. So is that just vibes or do you think there are cracks that the data just haven't caught yet?

JOANNE HSU: The data that people are talking about is typically backward looking data. By definition, it's telling us where we are our last month, last year. Whereas when we asked consumers about sentiment, we're asking them to project into the future. So the economic data that we're often talking about and the economic views and expectations of consumers, they're not even covering the same time period. We're asking people where they think things are going because that's what's going to affect their decisions.

And what's pretty clear is that consumers are quite worried that the economy is going to slow down in the future, regardless of where the economy was last month or last year.

CAROLINE WOODS: So if we would look at the sentiment report as an early recession indicator, are you picking up warning signs that the economy could tip into a downturn or an actual recession?

JOANNE HSU: What we're seeing very clearly is that consumers are expecting something closer to stagflation going forward. They are expressing perceptions of weakness, not just with business conditions and unemployment, but also they're expecting inflation to come back. So what's really tricky about this for policymakers is that this is showing negative signals for both sides of the Fed's dual mandate. And so broadly speaking, they're expecting both unemployment and inflation to get worse in the year ahead. And that is a very challenging situation for policymakers.

CAROLINE WOODS: And so broadly speaking, if the Fed does start cutting rates in September, could that have a direct impact on the sentiment report?

JOANNE HSU: It could. It depends on what the downstream effects are. Certainly it is true that if borrowing costs for consumers do tick down, that consumers will feel like it. It will improve buying conditions for big ticket items like homes or durables or cars. But that's also going to depend on what that does to prices.

If inflation continues to come down, then that could lead to an increase in confidence for consumers. But if inflation continues to creep up or even come surging back as many consumers are expecting, then it doesn't. It won't matter if interest rates are low. If inflation comes roaring back, it's going to weigh on consumers if that's the case.

CAROLINE WOODS: What do you think has done more damage to consumer psychology, inflation or high interest rates?

JOANNE HSU: What we have seen very, very clearly since the tail end of the pandemic is that high prices and inflation have been absolutely the top concern on consumers' minds. We have been seeing that pretty much continuously for the last three years. And the major uptick in inflation expectations that we saw in 2025 are directly related to tariff policy.

Now, high interest rates are certainly something that matters to consumers, particularly when it comes to major purchases like homes and cars. But it's very clear from our data when we look at the open-ended comments on these major purchases, that it's not just high interest rates, it's also high prices. So unless prices of homes come down, a marginal reduction in borrowing costs for mortgages isn't necessarily going to make people feel like it's a good time to buy a house.

CAROLINE WOODS: OK, so what's the takeaway for investors then? Because as we said, the personal income and spending report showed that consumers, although wary, are still spending, still making money. The stock market is very close to all-time highs. Yet this data paints a different picture. So what's the takeaway for investors?

JOANNE HSU: What I think is important for market watchers to note is that consumers are bracing for and are anticipating a slowdown in multiple dimensions of the economy. It's not just thinking that one aspect of the economy is going to deteriorate. They are worried about business conditions, unemployment, their own incomes, and inflation. All of the above.

And as a result, we're not in the same moment as we were in 2022. So, you know, I think it's important to look at the consumer outlook with caution. Consumers see a lot of warning signs. Many of them are expecting that upcoming weakness in labor markets may affect them. So we can't necessarily be expecting the type of consumer resilience we saw in 2022. But if labor markets remain strong, then consumers may end up being more resilient. But as again, that's not what consumers are expecting at this time. They are quite worried about the future of labor markets.

CAROLINE WOODS: All right, jobs really the backbone of consumer sentiment. Joanne Hsu University of Michigan, Thank you so much for shedding some light on the state of the consumer right now.

JOANNE HSU: Thanks for having me. Even though it seems a little bit dire.