Americans haven’t felt this bad about the economy since the early days of the Reagan administration. Maybe worse.
The University of Michigan’s consumer sentiment index cratered to 50.8 in its final April 2025 reading, a number so low it sits near the worst levels recorded in the survey’s seven-decade history. That’s not a typo. The index, which tracks how households feel about their finances and the broader economy, has now fallen for four consecutive months and dropped roughly 8% from the preliminary April estimate alone, according to Business Insider. The reading lands in territory previously visited only during the stagflationary misery of the late 1970s and the 2008 financial crisis.
What’s driving the collapse? Inflation expectations have become unmoored. Consumers now expect prices to rise 6.5% over the next year — the highest one-year inflation expectation since 1981. The five-year outlook isn’t much better, jumping to 4.4%. These aren’t abstract numbers. They shape how people spend, save, and plan. And right now, the planning looks grim.
The proximate cause is tariffs. President Trump’s aggressive trade policies — including sweeping tariffs on Chinese goods that have escalated into a full-blown trade war — have injected deep uncertainty into household budgets and corporate boardrooms alike. Gas prices, grocery bills, and the cost of imported goods are all under pressure. Consumers see it every time they fill up a tank or walk through a Walmart.
Joanne Hsu, the director of the University of Michigan’s Surveys of Consumers, put it bluntly: sentiment has declined across all demographic groups regardless of age, income, education, geography, or political affiliation. That kind of unanimity is rare. It suggests something deeper than partisan grumbling.
The political dimension is impossible to ignore, though. Republican confidence, which surged after Trump’s election victory in November, has since reversed sharply. Independent voters are even more pessimistic. And Democrats, already dour, have sunk further. The bipartisan nature of the decline undercuts any narrative that this is simply opposition-party handwringing.
Wall Street has taken notice. The S&P 500 has been volatile throughout April, whipsawed by tariff announcements, partial rollbacks, and contradictory signals from the White House. The bond market is pricing in growing recession risk. Treasury yields have fluctuated as traders try to reconcile strong employment data with collapsing consumer confidence — two indicators that historically don’t diverge for long before one of them proves right.
So which one is lying?
The labor market, by most conventional measures, remains solid. Unemployment sits near 4.2%, and weekly jobless claims haven’t spiked. Employers are still hiring, particularly in healthcare and government. But there are cracks. Layoff announcements from major technology and retail firms have accelerated. Small business optimism, tracked separately by the NFIB, has also deteriorated. And the Conference Board’s own consumer confidence index, while not as dire as Michigan’s, has been trending lower since January.
The divergence between hard data and soft data — actual economic activity versus surveys of how people feel — has become one of the defining puzzles of the 2025 economy. GDP growth in the first quarter is expected to come in tepid but positive. Retail sales in March were surprisingly resilient, partly because consumers rushed to buy goods before tariffs took effect. That kind of pull-forward demand can mask underlying weakness. It often does.
History offers an uncomfortable parallel. In early 2008, consumer sentiment was deteriorating rapidly even as some economic indicators looked passable. The University of Michigan index dropped below 60 in February of that year. By autumn, the financial system was in free fall. No one is predicting a 2008-style crisis today — the banking system is better capitalized, household balance sheets are stronger — but the speed and breadth of the confidence decline has rattled economists who remember how quickly things can turn.
Inflation expectations matter enormously to the Federal Reserve. Chair Jerome Powell has repeatedly emphasized that long-run expectations must remain “well anchored” for the central bank to maintain its credibility. A 4.4% five-year expectation is not well anchored. It’s the kind of number that forces the Fed into difficult choices: cut rates to support a weakening economy, or hold firm to prevent inflation psychology from becoming self-fulfilling. The Fed held rates steady at its March meeting and signaled patience. But patience has a shelf life when consumers start behaving as if prices will spiral.
The tariff situation remains fluid and confusing. The administration announced a 90-day pause on some reciprocal tariffs in early April, which briefly calmed markets. But tariffs on Chinese imports have climbed to effective rates exceeding 100% on many categories. Beijing has retaliated. Supply chains that took decades to build are being rerouted in months, with costs passed directly to American buyers. Companies from Apple to Nike have warned about margin pressure. Small importers, who lack the scale to absorb tariff costs, are in worse shape.
Consumer-facing businesses are already adjusting. Walmart, Target, and other major retailers have signaled that price increases are coming — or have already arrived. Auto prices, already elevated from pandemic-era supply shortages, face another leg up as tariffs hit imported vehicles and parts. The National Automobile Dealers Association has warned that the average transaction price for a new car could rise by several thousand dollars. For a household already stretched by housing costs and insurance premiums, that’s not an abstraction. It’s a reason to delay a purchase. Or cancel it entirely.
And that’s the real danger. Consumer spending accounts for roughly 70% of U.S. GDP. When confidence collapses, spending eventually follows — not immediately, but with a lag that typically runs three to six months. If the Michigan index stays at or below 50 through the summer, the holiday shopping season could be significantly weaker than retailers are currently projecting. That feeds into corporate earnings, hiring decisions, and capital expenditure plans. The feedback loop is well understood. It’s also hard to stop once it starts.
Some economists argue the sentiment data overstates the problem. People tell pollsters they feel terrible, then go out and spend anyway — a phenomenon dubbed the “say-do gap” that has persisted since the pandemic. There’s truth to this. Real consumer spending has held up better than sentiment readings would predict for over two years now. But the gap has been narrowing. Credit card delinquencies are rising. Savings rates have fallen. The excess savings built up during COVID stimulus have largely been depleted for all but the wealthiest households.
The wealth effect from stock market gains, which buoyed spending in 2023 and 2024, is now working in reverse. The S&P 500 is roughly flat year-to-date after a sharp selloff in early April. For the millions of Americans whose retirement accounts are tied to equity markets, portfolio anxiety is real and growing. It shows up in the Michigan survey’s assessment of personal financial conditions, which hit its lowest level since 2009.
International context adds another layer of concern. The eurozone is grappling with its own tariff-related uncertainty. China’s economy, already slowing, faces additional headwinds from reduced American demand. Global trade volumes are contracting for the first time since the pandemic. The World Trade Organization recently revised its 2025 trade growth forecast sharply downward, citing tariff escalation as the primary risk.
Back in Washington, the political calculus is shifting. Congressional Republicans from swing districts have begun publicly questioning the tariff strategy. Business lobbying groups, including the U.S. Chamber of Commerce and the National Retail Federation, have intensified their opposition. The administration insists the tariffs are working — that they’ll bring manufacturing back, reduce the trade deficit, and ultimately strengthen the economy. That may prove true over a longer time horizon. But consumers live in the short term. They feel the price increases now. The factory jobs, if they materialize, come later.
The University of Michigan will release its next preliminary reading in mid-May. If the number stabilizes or ticks up, markets will breathe easier. If it drops further into the 40s — territory never before recorded — the recession conversation will shift from “if” to “when.” Federal Reserve officials will face mounting pressure to act. Corporate earnings guidance for the second half of 2025 will darken.
For now, the American consumer is sending a clear signal. It isn’t subtle. The question is whether anyone in a position to change course is listening.