Are Consumers Waving a Red Flag?

Executive Summary

Consumers drive our economy, and the Consumer Sentiment Index is a measure of how consumers are feeling. The April 2025 reading of 50.8 is the second lowest level on record (see first graph). As shown, that is lower than during the Technology Bubble burst and the Great Financial Crisis of 2008. Many would attribute it to the high debt levels accumulated during the decade of low interest rates. Now those debts are accompanied by higher interest rates, and consumers are feeling the pain. The second graph shows inflation expectations elevating, which adds more pain to consumers. It appears consumers are feeling cautious about spending, which could impact economic growth.

For further analysis, continue to read The Details below for more information.

“Creditors have better memories than debtors.”
–Ben Franklin

The Details

Consumers drive the economy. Whether consumers borrow and spend or save and paydown debt, often depends upon how they feel about their financial condition, their expectations regarding their future earnings potential, changes in prices, and business conditions. The University of Michigan started compiling consumer surveys in these areas into a Consumer Sentiment Index in 1978 (although they began surveying consumers in 1946). The graphs below are from VettaFi. The first graph presents the current Consumer Sentiment Index.

The April reading of 50.8 is the second lowest on record and was only lower in June 2022 during the bedlam surrounding the pandemic. This was the fourth consecutive drop in the index, down 11% from March and down a whopping 30% this year. Think about that for a minute. Since 1978, the markets suffered the 1987 crash, the bursting of the Technology Bubble, the Great Recession and Financial Crisis, Covid 19 and six recessions, yet the Consumer Sentiment Index is lower today than any of those periods.

Why is the consumer outlook so glum? It might have to do with the fact that the Federal Reserve Bank held interest rates down to near zero percent for the better part of a decade, with one brief interruption, encouraging consumers to borrow and spend. And that is exactly what consumers did, pushing student loans, credit cards and other revolving loans through the ceiling. Then when inflation started rearing its head, interest rates began to rise. High interest rates and high debt are a dreadful combination.

The one-year and five-year inflation expectations part of the survey are especially troubling, as shown in the results below. The one-year inflation expectation of 6.7% is the highest since 1981! For those carrying credit card debt, with the average interest rate over 21% and expectations of surging inflation, it starts to make sense why the current Sentiment Index is so low.

The sentiment of consumers impacts how they spend, save and borrow. The current reading indicates consumers will proceed with extreme caution. This can be corroborated by the data outlined in my April 1st missive entitled, “Is a Recession Next?”

The consumers’ dismal outlook will lead to a slowdown in spending and will likely lead them to take a more risk averse stance when investing. Neither of these are good for economic growth nor stock market returns. Consumers appear to be waving a red flag.

The S&P 500 Index closed at 5,363, up 5.7% for the week. The yield on the 10-year Treasury Note rose to 4.49%. Oil prices remained at $62 per barrel, and the national average price of gasoline according to AAA fell to $3.19 per gallon.