Bummed Consumers Predict Shrinking Labor Market, Spiking Inflation

US consumers were asked to look into their crystal balls in September. They didn’t like what they saw.

Americans reported growing pessimism about the trajectory of inflation as well as the labor market, according to the Federal Reserve Bank of New York’s latest monthly Survey of Consumer Expectations, released on Tuesday.

An Uptick in Worry

The official unemployment rate in the US last month is, for now, a mystery that not even the Scooby Doo gang could solve: Only lawmakers can end the government shutdown that put the Bureau of Labor Statistics’ latest report on hold, and Shaggy doesn’t have a seat in Congress. But private sector data from the ADP’s latest National Employment Report showed that hiring deteriorated in September, lending support to the uneasiness registered by consumers in the latest NY Fed Survey.

The survey showed a mean expectation of 41.1% that the unemployment rate will be higher in 12 months. That’s up 2 percentage points from August. The median expectation of inflation for the next 12 months rose to 3.4% from 3.2% in August, and the five-year inflation expectation rose to 3% from 2.9%. That’s higher than economists’ and government estimates, which nevertheless see inflation reaching about 3%, well above the Federal Reserve’s 2% target. The 2.7% year-over-year inflation in groceries in August, the fastest annualized rate since August 2023, is likely to have had a particularly significant impact on consumers. The Bureau of Labor Statistics’ report on September inflation, due on October 15, would offer an update on how tariffs are impacting prices, but only if the government shutdown ends before then. In the meantime, more consumers signaled belt-tightening is in order:

• The perceived probability of losing one’s job in the next year rose 0.4 percentage point to 14.9%, according to the NY Fed survey. Unsurprisingly, consumers said they were aiming to be more frugal: Median spending growth estimates dropped 0.3 percentage point to 4.7%, below the 4.9% trailing 12-month average.
• “Labor market expectations continued to deteriorate with consumers reporting lower expected earnings growth, greater likelihoods of losing jobs, and a higher likelihood of a rise in overall unemployment,” the report says.

Willing to Gamble: Whatever they say, consumers’ actual spending has remained rock solid, even if sentiment has yet to return to pre-pandemic levels. The NY Fed Survey also showed improving views of household finances. Analysts at KPMG expect spending to keep rising through the holiday season, writing in a report two weeks ago: “The consumer is spending like a poker player with a small chip stack. They know they can’t play every hand but are willing to go ‘all in’ on a promising hand with a high emotional payoff.”