War in Gaza, High Interest Rates and Inflation Darken Consumer Outlook on US Economy

Consumers feel the economy sliding in November amid horrifying reports from the Middle East and rising social unrest in the U.S. following the Oct. 7 attacks on Israel.

The University of Michigan's Consumer Sentiment Index for the month fell to 60.4, compared to a reading of 63.8 in September. That's far lower than the 63.7 reading that economists polled by Dow Jones expected.

The index, down 5% for the month, has fallen for four straight months.

The results are preliminary and will be updated at the end of the month. 

Survey Director Joanne Hsu said the souring sentiment reflects the toll that higher interest rates are taking on consumers.

"Ongoing wars in Gaza and Ukraine weighed on many consumers as well," she said.

Consumers also continued to fret inflation, even as it appears to be easing. Year-ahead inflation expectations rose from 3% in October to 3.2% in November, the highest reading since 2011.

That dismal reading comes despite the fact that inflation has declined precipitously since hitting a peak of over 9% in June 2022.

Inflation is running at 3.7% as measured by the consumer price index for September. That's well-above the Federal Reserve's target of 2%. The Labor Department will report October's CPI on Nov. 14.

Consumers reported a perceived 6.9% decline in current economic conditions from October to November. Additionally, the university's index tracking how strong consumers think the economy will be fell 4% from October to November, indicating declining optimism.

The U.S. reported economic growth of nearly 5% in the third quarter, but many economists expect it to slow drastically through the rest of the year, and that is reflected in consumer sentiments.

What consumers feel and what they do are often two different things. While consumers express doubts about the economy, consumer spending remains strong and retailers are expecting record holiday sales in the weeks to come.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, noted the gap between confidence and spending in a presentation earlier this week.

“Sometime around the Great Financial Crisis, the relationship between reported consumer confidence and future spending broke down," he said. "That’s become a lot less reliable measure. I don’t 100% know what to make of it.”