Featured in FT Unhedged: Poor consumer sentiment is still just talk

And it may never turn into action

According to Joanna Hsu, who oversees the Michigan survey, absolute levels of consumer confidence are not as important as trends:

"Direction is the most important . . . The sharp decline in consumer sentiment leading into mid-2022, attributable to the surge in inflation, was not accompanied by a sharp pullback in consumer spending. Since mid-2022, sentiment was on the rise — which translated to strong consumer spending, even though the level of sentiment remained below its historical average."

This is all the more true when one considers America’s growing partisan divide. As more and more Americans live in different media bubbles and identify more strongly with a political “team”, they know different facts and interpret the same fact very differently. “There is always a partisan switch at the start of any administration,” says Stephanie Guichard at the Conference Board — with the losing party, in this case Democrats, seeing a drop in consumer confidence at the start of the term (though the divergence is more stark this year than in 2021). Growing partisanship may make the readings less predictive. In 2022-24, for example, Republicans were grim about the economy but continued to spend merrily

Partisanship may have also made sentiment sub-indicators less reliable. Dominic White at Absolute Strategy argued to us that there was never much of a reliable leading relationship between consumer aggregate expectations and aggregate growth. There was, however, a decent relationship between the individual expectation components with current economic trends, specifically the employment expectations component from the Conference Board survey. But even that has fallen apart in recent years. Here is the proportion of Conference Board respondents’ expecting fewer jobs in six months’ time, plotted against US jobless claims. That relationship no longer holds (chart from Absolute Strategy):

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