Consumer Sentiment – Can it be Trusted

The May number for the University of Michigan’s consumer sentiment index (graph below) was released last week and at 50.8 percent it was the lowest since June of 2022 when inflation was at 9.1% and one of the lowest levels recorded in the past 50 years. 

It’s Definitely not a Positive

On the surface this is not good news for the economy as consumer spending accounts for 70% of GDP.   This low score was driven by several factors. These include concerns over higher inflation, uncertainty from the tariffs, a poor assessment of their own personal finances and fears of rising unemployment.  

Actions don’t line up with Words

The reason this may not be as bad as the number indicates is that over the past 5 years the link between sentiment and consumer spending has been weak.  Although people indicate real concerns over the economy their spending has held up well.  I can see this play out in real time. My wife has voiced concerns over the economy, tariffs, and inflation. Still, her spending hasn’t changed.

The reason for this disconnect can be associated with several factors including the extreme political polarization and increased differences in the financial health of lower and higher income households.

Could this Time be Different

It is possible that consumer sentiment and spending may line up this time.  The one factor that has changed recently is the weakness in consumer sentiment is not only being shown with lower income households but also with higher income households.  In 2022, when sentiment numbers were low, it was primarily driven by lower- and middle-income households while higher earners continued to have a positive outlook.  These higher income earners have continued to spend over the past 5 years. However, if they don’t feel as confident about the economy, and were to pull back on their spending, the impact would be more noticeable and could change the trajectory of GDP growth.