In the Kenan Institute’s monthly economic briefing April 4, I pointed out that March’s labor market indicators were quite positive, with healthy job growth reflecting US firms’ cautious optimism regarding new tariffs and these policies’ economic impacts. April’s labor market indicators, released earlier this month, showed much the same.

US consumers, however, are much gloomier. Consumer sentiment has declined steadily in 2025 and plummeted from March to May, according to the University of Michigan’s Index of Consumer Sentiment. May’s index level, at barely over 50, is nearly equal to its historic low set in 2022, inversely mirroring consumer expectations for inflation, which hit their highest mark since 1981. These trends are worrying because consumer spending makes up 70% of US GDP.

Economic expectations can be self-fulfilling. Firms that expect prices to rise may stock up on component goods or preemptively raise prices to insulate themselves from coming shocks, actions that would on their own be inflationary. Meanwhile, households that expect higher prices and a weakening labor market, as the recent sentiment indices indicate, may stock up in the near term and then tighten their belts, further dampening the nation’s overall economic outlook.

One positive is that household balance sheets remain strong for every income group, largely because American homeowners have gained tremendous asset value in recent years. Increased home values have financed consumption, powering the American economy through challenging headwinds. The mood, however, seems to be souring.

The gloom is especially pronounced among young people, ages 18 to 34, who are less likely to own homes and are now more negative about the US economy’s future than are other age groups. The economic pessimism among America’s young relative to other age cohorts is unusual – occurring in less than 3% of the monthly sentiment surveys since it started in 1978 – and a concerning indicator for future growth. If young people feel pessimistic about the economy’s future, they may avoid making investments today that would grow into valuable assets over time.

Some experts now view a 2025 recession as likelier than not, driven by new barriers to trade and uncertainty regarding retaliatory tariffs. New tariffs, even those paused or rescinded, have already diminished growth prospects and sparked fears of inflation. These burdens weigh on consumer sentiment and shape expectations, affecting outlooks that could become a reality as US firms and households plan for an uncertain economic future.

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