By Sabrina Escobar | Friday, May 16

Gloom, but No Doom.  Americans are feeling glummer about the economy than they have in nearly three years, but so far they're not acting like it. 

The University of Michigan’s consumer sentiment index ticked down to its second-lowest reading since 1978 in the first two weeks of May, according to preliminary results released Friday. The index fell to 50.8 from April's reading of 52.2. The all-time low was a reading of 50 recorded in June 2022, when inflation hit a 9.1% annual rate. 

This time, concerns over tariffs seem to be clouding consumers' outlook about the economy. Many Americans are betting inflation will spike again as tariffs get implemented, and they're growing wary about the state of the labor market and their future earnings potential. 

Economists worry that these tariff fears could prompt consumers to spend less in the next few months, which could take a toll on economic growth.

But in the past five years, there has been little correlation between how Americans feel about the economy and how they've shopped. And while there have been some signs that consumption is cooling, spending  remains resilient. First-quarter consumer spending gained 1.8% from last year, according to a preliminary GDP reading. Retail sales ticked up 0.1% last month from March, a slightly lower increase than the 0.2% gain economists were forecasting, but an increase nonetheless. 

“Yes, scary numbers from the survey, but not so bad with some perspective," said Robert Frick, corporate economist with Navy Federal Credit Union. "If you took them at face value Americans would be crashing the economy by spending next to nothing, but retail sales rose last month, though slightly."

Plus, it's worth noting that the preliminary results won't reflect any sentiment shifts as a result of the Trump administration's decision to temporarily lower tariffs on China to 30% from 145%. 

Investors have shaken off their tariff blues to rally behind the prospect of more trade deals being announced in the next few days. 

All three indexes had their best week since the Trump administration began temporarily rolling back tariffs in April.

On Friday, the Dow Jones Industrial Average rose 332 points, or 0.8%, turning positive year-to-date. On a weekly basis, the index gained 3.4%.

The S&P 500 gained 0.7% today and the Nasdaq Composite rose 0.5%. They gained 5.3% and 7.2%, respectively, this week. 

Whether the rally will continue into next week is anybody's guess, but markets may have to factor in a new tidbit of news that broke after the close Friday.

Credit-rating firm Moody's downgraded U.S. debt one notch to Aa1 from Aaa, reflecting "the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns," the firm said Friday. 

It added:

We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The U.S.’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.

The downgrade means all three major ratings firms have now moved U.S. debt below their top ratings. Follow Barron's coverage here. 

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