America’s Top Consumer-Sentiment Economist Is Worried

The University of Michigan's Index of Consumer Sentiment reached near-record lows this spring, plummeting 29% in the first four months of 2025—a decline historically preceding recessions over the survey's 79-year history. Despite a slight rebound in early June, the index continues to signal consumers' expectations for persistently high prices and a significant economic slowdown in the year ahead, underscoring potential headwinds for future growth.

Analysis

The University of Michigan's Index of Consumer Sentiment has signaled a significant deterioration in US household confidence, a key forward-looking economic indicator. A precipitous 29% decline during the first four months of 2025 pushed the index to near-record lows, a velocity of decline that has historically preceded recessions over the survey's 79-year history. This pessimism is broad-based, fueled by consumer concerns over high prices, weakening business conditions, and personal financial security related to income, housing, and the stock market. Despite a marginal improvement in early June, the prevailing sentiment continues to point towards expectations of sustained high inflation and a markedly slower economy in the coming year, posing a substantial risk to future consumer-driven growth.

Key Decisions for Investors

• Given the sentiment index's historical accuracy as a recessionary indicator, investors should re-evaluate their exposure to cyclical consumer discretionary sectors and consider a more defensive portfolio allocation.
• Closely monitor upcoming inflation data and employment reports for either confirmation of this negative trend or signs of a potential reversal in consumer outlook.
• Consider increasing allocations to non-cyclical sectors such as consumer staples and healthcare, which tend to demonstrate more resilience during periods of economic slowdown and weak consumer confidence.