Consumer sentiment measures are the best predictor of how Americans feel about the economy, especially the University of Michigan’s Consumer Sentiment Index (CSI). The CSI provides a composite consumer sentiment score, based on answers to the following 5 survey questions:
"We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?"
"Now looking ahead--do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?"
"Now turning to business conditions in the country as a whole--do you think that during the next twelve months we'll have good times financially, or bad times, or what?"
"Looking ahead, which would you say is more likely--that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?"
"About the big things people buy for their homes--such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?"
Consumer sentiment measures are lagging indicators of current economic conditions, because it takes people several months to notice and feel the effect of changes in the economy. That's because people generally sum their financial well-being over months and don't immediately change their impressions of, say, inflation, based on a few recent experiences. So even though the numbers for GDP growth, employment, wage growth, and inflation have been looking good for several months, the CSI remained in the doldrums throughout most of 2023 - until a modest uptick in December.
But there’s more to the story than “subjective” consumer sentiment playing catch-up with “objective” economic indicators. The St. Louis Federal Reserve just posted a piece suggesting that consumers in 2023 were still reeling from the impact of earlier inflation, which constrained their spending and put a damper on CSI scores. It wasn’t that they simply hadn’t gotten used to better times but that they weren’t yet in a financial position to take advantage of better times. Gotta pay down those high-interest credit cards before buying a new refrigerator. To quote:
"The poor sentiment seems more reasonable, however, when examining year-over-year real growth of personal income... Even though economic output and employment were both up in 2021, households began to experience a sharp increase in the cost of living. Rapid increases in consumer prices eroded income gains, causing real income growth to be negative in the final three quarters of 2022; more generally, real income growth has been below its long-term average since the first quarter of 2022."
Over the past 20 years, the highest CSI was in February 2020, when it was at 101. Americans were feeling good about the economy and their personal finances until Covid hit, and that is one reason some long for a Trump return. As of November 2023, the CSI was at 63 - still a long way to go to reach pre-pandemic highs. However, the Fed thinks consumer sentiment will bounce back, but only if the economy continues to perform well. That’s a big ‘if’.
Links:
https://fred.stlouisfed.org/series/UMCSENT
https://www.stlouisfed.org/on-the-economy/2024/jan/what-behind-recent-slump-consumer-sentiment