American households are growing more pessimistic about the economy. The University of Michigan’s preliminary October consumer sentiment index fell to 46.3, down from 48.1 in September and below the 47.3 reading economists had expected. It marks the weakest level in five months and underscores how persistently high prices are shaping the mood of the American consumer.
Cost of living is the common thread
Survey director Joanne Hsu said frustration over the cost of living keeps building, and that consumers across the political spectrum believe the economy has lost ground since the start of the year. With midterm elections 25 days away, sentiment improved among both Democrats and Republicans, but a decline among independents more than offset those gains.
The pain is uneven. Lower-income households and those with smaller stock portfolios, the groups with the least cushion against rising prices, saw sentiment decline this month. That divide matters: a market rally does little for the families that don’t own much of the market.
Inflation expectations are moving the wrong way
Consumers now expect prices to rise 4.7% over the next year, up from 4.6% in September and well above the 3.4% recorded in February, when the Middle East conflict and the resulting energy shock began. Long-run expectations ticked up to 3.5% from 3.4%, and they have stayed above the 2.8%–3.2% range seen in 2024. Expectations matter because they can become self-reinforcing, influencing wage demands and pricing decisions.
Energy is a major driver. Gas prices are up more than $1.50 a gallon on average since the war began, according to AAA, and have held above $4 since mid-summer.
Borrowing costs add pressure
Rates are compounding the problem. The 10-year Treasury yield has climbed above 5%, with some analysts warning it could approach 6%, a level not seen since 2000. That flows directly into household borrowing: Freddie Mac reports the average 30-year fixed mortgage rate rose to 7.4% this week, a three-year high. Concerns about a national debt now above $40 trillion are also weighing on consumer views of buying conditions.
Why it matters for investors
Consumer spending drives roughly two-thirds of U.S. economic activity, so sentiment readings are worth watching. A weak mood combined with elevated inflation expectations leaves the Federal Reserve in a difficult spot: easing is harder to justify when households expect higher prices, but tighter financial conditions risk squeezing the consumer further. Retail, housing-related, and consumer discretionary names are the most exposed if sentiment keeps deteriorating and spending follows.
What to watch next
The October figure is preliminary, and the final reading is due later this month. Investors should watch whether sentiment stabilizes or keeps sliding, whether year-ahead inflation expectations push further above 4.7%, and how the 10-year yield behaves as it flirts with higher levels. Gas prices and mortgage rates will also be telling: if they ease, the pressure on households could lift; if they keep climbing, the sentiment gap between higher- and lower-income consumers may widen further.
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