Consumer sentiment in the United States has taken a significant hit as the ongoing conflict in Iran continues to create turbulence in financial markets. The University of Michigan reported a 6% decline in consumer sentiment this month, bringing the final reading to 53.3, marking the lowest level since December. This drop is even steeper than initial estimates made earlier in the month, coinciding with the onset of the war. Analysts had expected a slight decrease to 54.2, but actual sentiment fell short of expectations.
The conflict in the Middle East has led to rising global energy prices over the past month, creating volatility in major U.S. stock indices as investors anxiously await signs of resolution. President Trump has indicated that the administration is currently engaged in discussions with Iran regarding the situation.
Joanne Hsu, the director of the survey, highlighted that negative sentiment has been felt across various demographics, including individuals from all income brackets, even the wealthiest households. Consumers with middle to higher incomes and investments are particularly affected, struggling with increased gas prices and unpredictable financial markets resulting from the ongoing conflict.
The potential for a drawn-out conflict raises concerns about inflation and could potentially push the U.S. economy into recession. Already, gas prices have surged since the beginning of hostilities, prompting worries about rising living costs. Notably, Americans’ expectations for inflation over the next year saw its largest monthly increase in about a year, rising from 3.4% in February to 3.8% in March—levels not witnessed since 2024.
However, respondents remain optimistic about long-term inflation, with expectations easing to 3.2% this month, down from previous highs. Hsu noted that consumers may not anticipate the recent inflationary pressures to persist in the long term. Nonetheless, this perception is contingent on the conflict’s duration and the extent to which rising energy prices affect overall inflation.
This sentiment could offer some comfort to Federal Reserve policymakers, as they monitor public perception regarding inflation, particularly in the long term. Stable long-term inflation expectations are crucial for maintaining confidence in the Fed’s ability to manage price rises effectively. The Federal Reserve aims for an annual inflation rate of 2%, while current figures stand at 2.8% as of January.
Interestingly, declining consumer sentiment has not historically led to decreased spending in the U.S. In the face of various challenges post-pandemic—such as in 2022 during peak inflation or in 2023 amid a congressional standoff over the debt ceiling—Americans have continued to spend. Consumer expenditure, which constitutes about two-thirds of the U.S. economy, is more closely related to labor market conditions than sentiment alone. Although job growth has slowed over the last year, unemployment claims remain low, and wage growth has surpassed inflation since mid-2023.
Consumers currently have the financial capacity to maintain spending, but this could change if layoffs rise significantly or job availability diminishes. Recent trends indicate that retail sales have been weaker, with a decline of 0.2% in January, following a stagnant December, likely impacted by severe winter weather.
Should the conflict in Iran persist, the broader economic outlook might darken quickly. A prolonged conflict could trigger a chain reaction: falling stock prices leading to reduced consumer spending, which could ultimately lead to an economic recession. Heather Long, chief economist at Navy Federal Credit Union, cautioned that in a K-shaped economy, the impact on the wealthier segments can rapidly extend to the broader populace.
