US consumer confidence rebounds after five straight months of declines due to tariff anxiety

US consumer confidence rebounded in May, rising to 98 from a low of 85.7 in April, driven by easing concerns over President Trump's tariffs following trade negotiations with China and the EU. The Conference Board's survey indicated improved short-term expectations for income, business conditions, and the job market, with reduced fears of a recession; however, economists caution that the positive sentiment may be temporary as existing tariffs could lead to rising prices and renewed inflation concerns in the coming months.

Analysis

US consumer confidence demonstrated a significant rebound in May, with The Conference Board's index rising 12.3 points to 98, up from April's 85.7, which was the lowest reading since May 2020. This improvement, breaking five consecutive months of declines, is primarily attributed to an easing of anxieties surrounding President Trump's tariff policies, following tariff pullbacks and trade negotiations, notably a 90-day pause on substantial tariffs on Chinese goods and an agreement with the U.K. The rebound gained momentum after the May 12 US-China trade deal. Short-term expectations for income, business conditions, and the job market jumped 17.4 points to 72.8; however, this figure remains below the 80-point threshold often viewed as a potential recessionary signal. Despite this, the proportion of consumers anticipating a recession within the next 12 months declined. While consumers' assessment of the present economic situation improved broadly across age and income groups, their view on job availability weakened for the fifth straight month, contrasting with a strong April jobs report showing 177,000 jobs added and a low 4.2% unemployment rate. Tariffs persist as the primary consumer concern, followed by inflation, although recent data showed consumer prices rose a modest 2.3% year-over-year in March, with core inflation at 2.6%. Economists, such as Robert Frick from Navy Federal Credit Union, express caution, suggesting the optimism might be temporary and that price increases from existing tariffs could re-ignite inflation concerns. Concurrently, consumer spending intentions for homes, cars, and vacations increased, particularly after the May 12 China tariff pause. The overall market sentiment is mildly positive but cautious, reflecting this mixed outlook.

Key Decisions for Investors

• Investors should acknowledge the short-term positive sentiment swing but remain vigilant about the sustainability of this consumer confidence rebound, particularly given economists' warnings about impending price increases from tariffs.
• Monitor upcoming inflation data and retail sales figures closely, as these will be key indicators of whether the current optimism translates into sustained economic activity or succumbs to tariff-related price pressures.
• Consider the persistent sub-80 reading in short-term expectations as a lingering risk factor for a potential economic slowdown, despite the recent improvement in overall confidence.
• Evaluate exposure to sectors sensitive to consumer spending and international trade, factoring in the ongoing uncertainty surrounding tariff policies and their potential impact on corporate earnings and consumer purchasing power.