Even wealthy Americans are souring on the economy as gas prices spike and stocks fall

By Bryan Mena, CNN

Washington (CNN) — Americans are growing more pessimistic about the US economy as the war on Iran continues to roil markets, with sentiment falling across all income groups — including the wealthiest.

Consumer sentiment declined 6% this month to a final reading of 53.3, the University of Michigan said Friday, a steeper drop than the one reported earlier this month, when the war had just started. Sentiment is now at its lowest point since December. Friday’s level was lower than the 54.2 reading that economists projected in a poll by data firm FactSet.

The Middle East conflict has pushed up global energy prices for the last month, prompting major US stock indexes to whipsaw as investors look for signs that it may end soon. President Donald Trump says the administration is engaged in talks with Iran.

“Declines were seen across age and political party,” Joanne Hsu, the survey’s director, said 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 both jack up inflation and tip the US economy into recession. Gas prices across America have already surged since the onset of the conflict.

Americans’ expectations for inflation in the year ahead posted the biggest monthly increase in about a year, climbing to 3.8% from 3.4% in February, higher than anything seen in 2024.

However, the respondents in the survey don’t expect higher inflation spurred by the war to stick around over the next five to 10 years, with long-run inflation expectations actually edging lower this month to 3.2%.

“Consumers may not expect recent negative developments to persist far into the future,” Hsu said. “These views are subject to change, however, if the Iran conflict becomes protracted or if higher energy prices pass through to overall inflation.”

That’s reassuring for Federal Reserve policymakers, who pay close attention to people’s perception of prices, particularly over the long run. Long-run inflation expectations serve as a proxy for Americans’ confidence in the Fed’s ability to rein in price increases. The Fed targets 2% inflation on an annual basis, as measured by the Personal Consumption Expenditures price index, which is currently running at 2.8%, as of January.

What souring sentiment means for the economy

Declining consumer sentiment has not translated to weaker spending in recent years.

Whenever sentiment plummeted after the pandemic — such as 2022 when inflation was running at a 40-year high or 2023 during a standoff in Congress over the debt ceiling — Americans continued to open their wallets.

Consumer spending, which accounts for about two-thirds of the US economy, is more influenced by the state of the labor market; specifically, whether layoffs are rising more than usual or not. While job growth has been anemic over the past year, new applications for unemployment benefits remain at historically low levels. And since mid-2023, wage growth has outpaced inflation.

That means Americans still have the means to continue to spend — until they don’t. A steep pick-up in layoffs, combined with the reality that it has become more difficult to find a job these days, would likely force Americans to cut back on their spending.

And spending in recent months has already been on the weaker side. Retail sales, which comprise a sizable chunk of overall spending, fell 0.2% in January, after being flat in December. Harsh cold weather likely weighed on spending in January.

If the Iran war drags on for months, the outlook could quickly darken, setting off a downward economic spiral as falling stocks give way to weaker spending and, ultimately, a recession.

“In a K-shaped economy, what impacts the top can quickly spread,” Heather Long, chief economist at Navy Federal Credit Union, said in commentary issued Friday.

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