Consumer Sentiment Declines Amid Rising Fuel Prices and Economic Uncertainty

In September, consumer sentiment took a hit as rising fuel costs and the impending midterm elections cast a shadow over economic expectations for both Republicans and Democrats.

The University of Michigan’s final consumer sentiment index dropped to 48.1 in September, marking the lowest level in four months, although it slightly improved from the mid-month preliminary measure of 47.8.

The inflationary pressures, largely influenced by the ongoing conflict in Iran, have severely impacted consumer confidence, pushing it closer to historic lows. This month, the Federal Reserve raised interest rates following the realization that the war wouldn’t end anytime soon and that oil prices were likely to remain high.

Joanne Hsu, the survey’s director, noted that “the short-run outlook for business conditions plunged amid renewed worries that elevated fuel prices and re-escalating trade disputes could affect the economy broadly.”

In September, diesel prices reached unprecedented highs while gasoline also saw a significant increase. Interestingly, despite these soaring costs, consumer spending in other areas of the economy remained strong, showing surprising resilience—likely fueled by low unemployment rates and the lowest year-to-date jobless claims since 1969.

Consumers anticipate a 4.6 percent rise in prices over the next year, up from four percent the month prior. For the next five years, their expectation for price increases sits at 3.4 percent.

Consumer sentiment fell by seven percent in September compared to August. Specifically, among Republicans, it decreased by 5.9 percent to 77.2; for Democrats, it dropped 11.4 percent to 35.6; and among independents, it saw a slight decline of 0.6 percent to 47.7.

This sentiment decline seems to be driven by waning optimism regarding future economic conditions. The assessment of current economic situations decreased by 1.9 percent in September, while the expectations measure fell by seven percent.

For Democrats, the expectations gauge plummeted by 16.2 percent. Sentiment had improved during the summer months, but the figures from August and September have erased those gains.

Among Republicans, the outlook measure also fell, down 11.4 percent, reflecting a 25.2 percent decline since the beginning of the year. Independents’ outlook dropped by 1.7 percent this month and is down by 10.6 percent year-to-date.

Hsu commented, “Despite political differences, consumers unanimously believe that the outlook for the economy has diminished.” In September, the outlook for the economy over the coming year fell to its lowest level since 2022, with consumers’ expectations regarding their personal finances also worsening.

“Overall, interviews show broad agreement across the political spectrum that the outlook for the economy has weakened since the start of the year,” Hsu remarked.

Even the somewhat positive aspect of consumer sentiment related to durable goods purchases is marred by inflation concerns. Although the survey indicated that buying conditions for durable goods have improved, this is largely because consumers are eager to make purchases before expected price hikes.