Consumer Sentiment

#82: Bridging the gap between economic data and sour sentiment.

The economy is doing great, people just don’t get it. Or, at least that’s what I keep hearing.

Despite nearly three years of economic expansion, the widely watched University of Michigan Consumer Sentiment Index today sits at depressed levels typically only seen in recession. Other surveys on economic conditions provide similarly dreary responses.

This weak consumer sentiment is at odds with the upbeat narratives of continued economic growth and easing inflation (though sentiment has improved since inflation peaked last summer).

Among the chattering class of economic and policy wonks, the gap between “data” and “perception” is more than a fly in the ointment. For some, the issue is a referendum on pandemic-era policy with highly political implications given upcoming elections. As such, many perspectives on the topic seem to be predictably drawn across party lines.

But it strikes me that dismissal of poor sentiment as simply “wrong” is shallow and condescending. Are people deeply mistaken in their own assessment of their personal finances and the broader economy or are deeper nuances at play? Today, we try to bridge the gap.

Better Off?

Two metrics are regularly offered to suggest that consumers’ dour opinions are misplaced. First, by official measures, real wages have risen since 2019. Therefore, ongoing dissatisfaction with inflation is chalked up to misinformation or financial illiteracy. The second is that household net worth has increased — people are wealthier according to the Fed. At a minimum, both of these arguments oversimplify complex issues.