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Consumer sentiment improves alongside wage growth

Consumer sentiment improves alongside wage growth

05/08/2025
Fabio Henrique
Consumer sentiment improves alongside wage growth

In June 2025, the University of Michigan’s consumer sentiment index surged by 16% from May to June, marking a welcome shift after six months of declines. Although the reading of 60.7 remains well below pre-pandemic levels, this rebound signals renewed hope in households that have weathered persistent inflation and economic uncertainty.

This article explores the factors behind this turnaround, examining how stronger wages, labor market confidence, and easing recession fears are driving sentiment higher. We also consider the continuing challenges many face as higher prices temper the benefits of wage gains.

The rebound in consumer confidence

After hitting a near-historic low of 50.8 in early May 2025, the sentiment index climbed sharply to 60.7 in June. This is the first increase in six months and reflects growing optimism about both personal finances and national economic conditions.

Despite this improvement, sentiment remains muted compared to the pre-COVID era. Many consumers cite lingering concerns over affordability and job security as reasons for cautious spending. At the same time, some key metrics have shown notable progress:

  • Consumer sentiment: 60.7 in June vs. 52.2 in May
  • Income outlook: 18% expect higher incomes vs. 15.9% in April
  • Job availability outlook: 19.2% see more jobs, up from 13.9%

This initial recovery in sentiment coincides with a reduced perception of recession risks. According to The Conference Board, fewer consumers now believe a downturn is imminent, contributing positively to overall confidence.

Wage growth and labor market strength

One of the primary engines behind the uptick in sentiment is the robust labor market and rising wages. While many households still feel the pinch of high prices, stronger income growth is beginning to alleviate financial pressures.

Recent data highlight key aspects of labor market optimism:

  • Real wages have increased, though unevenly across income groups
  • 12.4% of consumers expect incomes to decrease, down from 13.5%
  • 19.2% see more job opportunities, the highest share since late 2024

These figures suggest that a growing share of consumers believe their earning potential is improving. Nevertheless, wage gains must compete with inflation, which continues to erode purchasing power especially for those in lower and moderate-income households.

Inflation’s impact on purchasing power

Despite stronger wage growth, many consumers report that rising prices have outpaced these gains. Core personal consumption expenditures (PCE) inflation rose 0.12% month over month in April, keeping annual inflation at 2.52%.

Higher costs for essentials such as food, energy, and housing are leading some households to rely more on credit. Use of credit cards and loans for basic expenses is elevated, particularly among those with limited savings buffers.

Goldman Sachs forecasts only 1.2% real consumer spending growth in 2025, down sharply from 3.1% in 2024. This moderation reflects both cautious household budgets and a return to more normalized spending patterns as pandemic-era savings wane.

Uneven recovery across income groups

While sentiment is rising on average, the pace of improvement varies significantly by income segment. Lower- and moderate-income consumers remain 32–37 points below April 2020 sentiment levels, highlighting persistent financial stress.

Regional and demographic differences further illustrate this uneven recovery. For example, sentiment gains in higher-income households outpace those in communities still grappling with inflationary pressures and limited wage growth.

  • High-income consumers report greater financial cushion and confidence
  • Low-income groups more likely to postpone major purchases
  • Consumers in trade-exposed regions show heightened inflation concerns

Such disparities suggest that broader improvements in aggregate sentiment may mask ongoing struggles for vulnerable populations.

Saving, spending, and future outlook

Amid these mixed signals, consumer behavior is evolving. Many households are prioritizing savings, either building emergency buffers or dipping into existing reserves to cover expenses. Others continue to delay large purchases of durable goods, such as vehicles and appliances, until confidence strengthens further.

Trade policy uncertainty, including potential shifts in tariffs on Chinese imports, also influences spending decisions. Sudden policy changes can stoke short-term inflation expectations, which recently peaked at 6.5%—the highest since 1981—even as actual inflation shows signs of moderation.

Looking ahead, consumer sentiment will likely depend on several key factors:

  • Ongoing wage growth vs. inflation trends
  • Job market resilience and unemployment expectations
  • Fiscal and trade policy developments

If wage growth continues to outpace price increases for a sustained period, households may regain enough confidence to boost spending on goods and services. Conversely, any unexpected spike in inflation or slowdown in hiring could dampen the nascent recovery in sentiment.

Ultimately, the June rebound offers a glimpse of renewed optimism after a challenging stretch. By balancing wage gains, controlled inflation, and stable employment prospects, policymakers and businesses can help sustain this positive momentum and support a more inclusive economic recovery.

Fabio Henrique

About the Author: Fabio Henrique

Fabio Henrique