As trade tensions ease, US consumer confidence index rebounds sharply in May

As trade tensions eased, the US Consumer Confidence Index rebounded sharply in May from a nearly five-year low, ending a streak of consecutive declines.

Data released by The Conference Board on Tuesday showed that the US Consumer Confidence Index rose by 12.3 points to 98 in May, significantly surpassing the expected value of 87 and the previous value of 86. This marked the first monthly increase since November last year and the largest monthly gain since March 2021.

The report also indicated that the index measuring Americans' short-term expectations for income, business, and the job market surged by 17.4 points to 72.8, though it remained below the 80 threshold, which typically signals an impending recession.

Over the past few months, a series of policies introduced by US President Trump had triggered a global trade war and dealt a severe blow to American confidence. Last month, consumer confidence fell to its lowest level since the outbreak of COVID-19.

However, this month, Trump made progress in trade negotiations with other countries. On May 8, Trump announced the outline of a new trade agreement with the UK. Most UK goods will still be subject to a 10% benchmark tariff. However, UK steel and aluminum will be exempt from the 25% tariff imposed by the US, while tariffs on the first 100,000 UK cars exported to the US will be reduced from 25% to 10%. Subsequently, China and the US also agreed to significantly reduce tariffs on each other's goods, representing an unexpected breakthrough for the market.

Stephanie Guichard, Senior Economist for Global Indicators at The Conference Board, stated, "The Consumer Confidence Index improved in May after five consecutive months of decline. This rebound showed signs before the China-US trade agreement was reached on May 12 and has since gained momentum."

The monthly improvement was primarily driven by consumer expectations, as all three components of the Expectations Index—business conditions, job prospects, and future income—rebounded from their April lows. Consumers' pessimism about business conditions and job opportunities over the next six months eased, and they regained optimism about future income prospects. Consumers' assessments of the current situation also improved.

Guichard added, "As the US stock market continued to rebound in May, consumers' outlook on stock prices improved. Forty-four percent of consumers expect stock prices to rise over the next 12 months (up from 37.6% in April), while 37.7% expect them to fall (down from 47.2% in April)."

Perceptions of the labour market also improved, with 19.2% of respondents expecting more job opportunities in the next six months, up from 13.9% in April. Meanwhile, 26.6% of respondents expected job losses, down from 32.4% previously.

Nevertheless, tensions remain. If countries fail to negotiate trade agreements with the US, by early July, the Trump administration will still have over 100 trade agreements to discuss, at which point his reciprocal tariffs will be re-imposed. Therefore, uncertainty remains high, raising the question: what does this mean for consumer spending, which accounts for two-thirds of the US economy?

Robert Frick, corporate economist at Navy Federal Credit Union, commented, "Consumer confidence may have soared, and Americans have reason to be happy given the reduction in tariffs, especially those on China. But when prices start to rise again in a month or two, it will be a sobering reminder that a new inflation battle has just begun."

Many companies have already warned of raising the selling prices of their goods, with Walmart being the most prominent. The world's largest retailer recently stated that it would not be immune to the impact of Trump's tariffs and planned to raise prices on some items later this month as the trade war drives up costs.