Increasing concerns about the U.S. inflation levels continue to dampen U.S. consumer sentiments. Notably, the University of Michigan’s consumer sentiment index declined to 82.9 in May from 88.3 last month. The reading remained mostly flat with May's preliminary reading of 82.8. The metric also remained on par with economists’ forecasts, per a Reuters poll.

The measure of current economic conditions declined to 89.4 in May from April's 97.2. It also dropped from May's preliminary reading of 90.8. Meanwhile, a gauge of consumer expectations fell to 78.8 in May from April's 82.7. However, the metric was nominally up from the mid-month reading of 77.6.

Moving on, one-year inflation expectation remained mostly flat with May's preliminary reading of 4.6%. Meanwhile, the survey's five-to-10-year inflation outlook reduced to 3% from 3.1%, according to a Reuters article.

In this regard, Surveys of Consumers chief economist Richard Curtin said that "Consumer confidence remained largely unchanged at the reduced level recorded at mid-month. It is hardly surprising that the resurgent strength of the economy produced more immediate gains in demand than supply, causing consumers to expect a surge in inflation," (per a Reuters article).

Current U.S. Economic Scenario

The world’s largest economy is steadily recovering from the coronavirus outbreak-induced slowdown. The pandemic also seems to be getting under control in the United States. Accelerated coronavirus vaccine rollout has been the major factor that has helped gaining control over the aggravating outbreak.

The decline in the number of coronavirus cases has increased optimism among market participants toward faster recovering and reopening of the U.S. economy. Moreover, a change in consumer behavior and shopping patterns is being observed as Americans are visiting stores for shopping merchandise like new clothes which signal toward normalcy. Large retailers like Walmart (WMT), Target (TGT), Home Depot and Macy’s have been gaining from the reopening economy and gradual return to normalcy.

Also, the latest ISM Manufacturing PMI data for the United States is painting a rosy picture for the sector. The ISM Manufacturing PMI read 61.2 in May against 60.7 in April. May’s growth was higher than analysts’ expectations of 60.7. Moreover, manufacturing activity rose for the 12th straight month.

Going on, the latest U.S. consumer confidence data looks decent as the metric remained steady in May after registering gains in April. The Conference Board's measure of consumer confidence index stands at 117.2 for May, mostly flat in comparison with April’s reading of 117.5. However, May’s reading missed the consensus estimate of 119.2, per a Reuters’ poll.

Lynn Franco, Senior Director of Economic Indicators at The Conference Board, has also reportedly said, “Overall, consumers remain optimistic, and confidence should remain resilient in the short term, as vaccination rates climb, COVID-19 cases decline further, and the economy fully reopens."

However, investors will be eagerly waiting for the Federal Reserve’s FOMC meeting scheduled for June 15-16.  They may have to also worry about certain factors like increasing inflation levels, tension surrounding the Fed’s chances of trimming the monetary stimulus earlier than expected and the brewing possibilities of a tax hike in the coming months, per a CNBC article.

ETFs That Might Suffer

The decline in consumer sentiment is likely to hurt the consumer discretionary sector, which attracts a major portion of consumer spending amid the inflation woes. Below we have highlighted the four most popular funds that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

The Consumer Discretionary Select Sector SPDR Fund XLY

This is the largest and the most popular product in the consumer discretionary space with AUM of $19.54 billion. It tracks the Consumer Discretionary Select Sector Index. The fund charges 12 basis points (bps) in fees per year and carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: ETFs in Focus as Amazon Agrees to Buy MGM Studio).

Vanguard Consumer Discretionary ETF VCR

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index. VCR charges investors 10 bps in annual fees. The product has managed $6.04 billion in its asset base and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: Will ETFs Gain on Starbucks' Q2 Earnings Beat Amid Pandemic?).

First Trust Consumer Discretionary AlphaDEX Fund FXD

This fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index. FXD has AUM of $1.86 billion. It charges 63 bps in annual fees and has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook (read: US Consumer Confidence Stays Stable in May: ETFs in Spotlight).

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index. The product has amassed $1.52 billion in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: Bet on These 5 Top-Ranked ETFs to Boost Portfolio Returns).