Consumers have given up saving for the American Dream and are spending money instead

Joan Hsu, director of the University of Michigan Consumer Confidence Survey, said: CNBC on Friday She believes Americans have given up on their plans to save money because they see their financial goals as less achievable and are spending money instead.

“This positive spending is not a reflection of some kind of secret internal feeling of confidence among consumers,” he explained. “Instead, my interpretation is that consumers see a lot of the aspirational goals we talk about as part of the American Dream — homeownership, paying for college, paying for your kids’ college, having a comfortable retirement — with high rates and high benefits. At the time Currently, those ambitious goals seem increasingly out of reach.

As a result, consumers have “given up” on saving to achieve these goals, Hsu added, noting that the still-strong labor market allows them to spend now.

The latest reading from the University of Michigan survey showed that sentiment fell to a six-month low of 67.4 in May from a final reading of 77.2 in April, as Americans pointed to stubbornly high inflation and interest rates, as well as concerns about potentially rising unemployment.

While this report was followed days later by April’s CPI that showed inflation slowing, it came after three straight months of unexpectedly high prices. Consumer-facing companies have sounded the alarm about the impact of inflation and rising interest rates, especially on low-income shoppers.

To be sure, inflation has fallen sharply from its highest rate in four decades (9%) in mid-2022 to 3.4% last month. But this means prices are rising less quickly rather than returning to pre-pandemic levels, and the cumulative shock over the past few years continues to weigh on sentiment.

Meanwhile, consumer demand metrics held up. In the first quarter, it continued to drive GDP growth. Despite the weak retail sales report, analysts noted that the overall trend points to continued spending.

Hsu warned that consumers currently expect the strong labor market to continue, giving them enough confidence to spend, but the latest data shows some decline.

“This may be an early sign of coming weakness for consumers,” she added. “But so far, strong incomes are supporting consumer spending.”

But the labor market also hinted at some cooling after big gains earlier this year. The Labor Department’s jobs report for April came in well below expectations, while the unemployment rate rose to 3.9% from 3.8% in March.

Further cooling in the labor market could also help prompt the Fed to start lowering interest rates, giving consumers a reason to be a little less stringent.