US consumer confidence grew in May despite a slate of bad economic indicators, from inflation to interest rates.
The non-profit research organization The Conference Board reported that consumer confidence in the US economy increased in April after declining for several months. That was despite fears of higher inflation and new interest rate hikes in the short term.
Consumer confidence rose to 102 in May, more than 97.5 in April, and the 96 expected by Bloomberg-polled analysts. According to the report, the strong labor market drove consumer confidence upward, despite recent backlash in April.
Unemployment in the United States reached 3.9% in May from 3.8% last month. Under the current President Biden’s administration, unemployment reached its all-time lowest at 3.7%. This is also the longest stretch of time US unemployment was below 4% since the Vietnam War.
The low unemployment is also driving investments in the stock market up, according to Invesco’s global strategist Brian Levitt. "We have a historically low unemployment rate and the wealth effects of investing in the market continue to go up. So, it shouldn’t be a major surprise that consumers are feeling well," Levitt told in an interview with Yahoo! Finance.
48% of respondents said they believe the stock market will go up in the next few months, the third-highest reading in history.
The shadow of inflation
Analysts were not expecting such high consumer confidence because of overly negative inflation readings so far this year. After a steep fall in late 2023, reaching 2.9% in December, inflation started edging up again in 2024.
In April, inflation measured 3.4% year-on-year without any stable path toward the 2% target. The US economy appeared too strong and consumer spending too high to stop inflation from rising.
The US Federal Reserve brought interest rates to a 23-year high of 5.25% last year. Since then, it kept rates stable hoping to see a radical reduction in inflation, which so far has not materialized.
This month, first quarter GDP data revealed lower-than-expected growth, a sign that perhaps interest rates started having a real effect. However, inflation data from May and June will be needed for a complete assessment of the US economy.
The Fed’s preferred gauge for inflation, the Personal Consumption Expenditure, will be released on Friday. Consumer spending is by far the biggest driver of the US GDP and inflation.
According to the Conference Board, the majority of consumers expect inflation to increase this year, with the Federal Reserve forced to hike rates once more. The same view is shared by JPMorgan’s chief executive Jamie Dimon, who believes markets are “not ready” for what’s about to come.
