Consumers were pessimistic about the economy even before Iran war

The Federal Reserve Bank of New York published its Survey of Consumer Expectations for February on Monday, offering a new snapshot of how the engines of this economy — consumers — are feeling.

The median expectation for inflation one year from now is 3%. That’s higher than the Fed’s target, and is similar to what consumers were expecting back in January. Views on the labor market were also relatively stable — consumers expected their earnings to grow by 2.5% in the year ahead, though the expectation was 2.7% in January.

This kind of survey data is what economists might call “soft data.” But it can still have real impacts on the economy, especially in times of global upheaval.

Joanne Hsu, director of the University of Michigan's consumer sentiment survey, said the fate of the economy depends largely on how consumers behave.

“What decades of research has shown is that consumer attitudes do influence what they decide to do with their money,” Hsu said.

For instance, last year, when the Trump administration signaled that tariffs were coming, consumers worried prices would rise.

“And we saw a surge of purchasing in durables and cars during that time,” Hsu said.

She said if that kind of demand surge lasts long enough, it could put upward pressure on prices.

“And could make inflation a self-fulfilling prophecy,” Hsu said.

In February, consumers expected inflation to outpace wage growth by half a percentage point next year. But the survey was fielded just before the war in the Middle East began. The war’s effects should be apparent in next month’s data, said Tuan Nguyen, an economist with RSM.

“Something like an increase in oil prices or conflict in the Middle East — it is immediately going to impact consumers' expectations,” Nguyen said.

In fact, consumers are feeling the impact already, said Kayla Bruun, lead economist with Morning Consult, which collects daily sentiment data from consumers.

“They've gotten gas over the past week and they've already started to see higher prices,” Bruun said. “So just today we saw a drop in sentiment.”

There was such a drop after Russia invaded Ukraine and oil prices jumped. But the consumer reaction then was short-lived, Hsu said.

“As the war continued, consumers began to think more about other factors in addition to the war in forming their economic expectations,” she said.

As for the current war in the Middle East, Hsu says we don't yet know if the negative consumer reaction will persist.