Wealthy Americans Grow Pessimistic as Gas Prices Rise and Stocks Decline
Americans are increasingly expressing concerns about the US economy as the ongoing conflict in Iran disrupts markets, with sentiment declining among all income brackets — even among the affluent. Consumer sentiment fell by 6% this month, reaching a final reading of 53.3, according to the report on Friday. This decline is more pronounced than the earlier figures released at the beginning of the month, coinciding with the onset of the war. Sentiment has reached its lowest level since December. Friday’s level fell short of the 54.2 reading that economists had anticipated in a poll. The ongoing conflict in the Middle East has led to a rise in global energy prices over the past month, causing significant fluctuations in major US stock indexes as investors seek indications of a potential resolution. President Donald Trump states, “the administration is engaged in talks with Iran.” Joanne Hsu stated “Declines were seen across age and political party,” in a release. “Consumers with middle and higher incomes and stock wealth, buffeted by both escalating gas prices and volatile financial markets in the wake of the Iran conflict, exhibited particularly large drops in sentiment.”
A prolonged war could significantly increase inflation and push the US economy into recession. Gas prices across America have already surged since the beginning of the conflict. Americans’ expectations for inflation in the year ahead recorded the largest monthly increase in nearly a year, rising to 3.8% from 3.4% in February, surpassing any figures observed in 2024. Nonetheless, the survey respondents do not anticipate that the inflation driven by the war will persist over the next five to ten years, as long-run inflation expectations have actually decreased this month to 3.2%. “Consumers may not expect recent negative developments to persist far into the future,” Hsu stated. “These views are subject to change; however, if the Iran conflict becomes protracted or if higher energy prices pass through to overall inflation.” This offers comfort to Federal Reserve policymakers, who closely monitor public perceptions of prices, especially in the long term. Long-run inflation expectations act as an indicator of Americans’ confidence in the Fed’s capacity to control price increases. The Federal Reserve aims for a 2% inflation rate annually, as indicated by the Personal Consumption Expenditures price index, which is presently at 2.8% as of January.
Despite a decline in consumer sentiment, spending has not shown signs of weakening in recent years. Despite the decline in sentiment following the pandemic — notably in 2022 when inflation reached a 40-year peak or in 2023 amid a congressional standoff regarding the debt ceiling — Americans persisted in their spending habits. Consumer spending, which constitutes approximately two-thirds of the US economy, is significantly shaped by the condition of the labor market; particularly, whether layoffs are increasing beyond the norm or not. Despite the sluggish job growth observed over the past year, new applications for unemployment benefits continue to be recorded at historically low levels. Since mid-2023, wage growth has indeed outpaced inflation. That indicates Americans still possess the capacity to keep spending — until they no longer can. The recent surge in layoffs, coupled with the increasing challenges of securing employment, is likely to compel Americans to reduce their spending habits.
Recent months have seen spending on the weaker side. Retail sales, representing a significant portion of total expenditure, decreased by 0.2% in January, following a stagnant performance in December. The severe cold weather is expected to have impacted spending in January. If the Iran war continues for an extended period, the prospects may swiftly deteriorate, triggering a downward economic spiral as declining stocks lead to reduced spending and, ultimately, a recession. “In a K-shaped economy, what impacts the top can quickly spread,” stated Heather Long.
