Even after the unexpectedly severe decline in the University of Michigan's consumer confidence measure to a seven-month low of 88.6 in May, from 95.9, the index is still above its long-term average of 85.9. It is hard to know just exactly what spooked households this month. Gasoline prices increased, but only modestly, while stock markets actually rallied. Nevertheless, regardless of the explanation, the decline in confidence suggests that the weakness of consumption in recent months may be more than just a temporary blip.



The expectations sub-index plummeted to 81.5, from 88.8. But, even at that six-month low, the index is at a level that historically has been consistent with real consumption growth of around 4% annualised. Accordingly, although this sharp fall back in confidence is a concern in light of the ongoing weakness of retail sales, it still doesn't explain why consumer spending has been quite as weak as it has been for the past few months.



The current conditions index fell to a seven-month low of 99.8, from 107.0. This is a little hard to square with the latest evidence on labour market conditions, with initial jobless claims running close to a 15 year low and employment growth rebounding in April.



"All things considered, the decline in confidence means that the potential for a pick-up in consumption growth over the next few months is probably smaller than we previously anticipated." said Capital Economics