Americans Feel Broke, but Their Spending Habits Say Otherwise
Americans Feel Broke, but Their Spending Habits Say Otherwise
A new Fed study found consumer sentiment is becoming a less reliable indicator for the real economy.
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American consumers feel like a recession is on the way, but the actual economy hasn’t got the memo yet.
The University of Michigan’s latest consumer sentiment index fell to 52.2 for April, down 8 percent from March and 32 percent from a year ago. Meanwhile, trade war and inflation concerns have dragged the economic expectations index down 32 percent since January, the sharpest three-month dip since the 1990 recession.
As tempting as it may be to use the survey to draw conclusions about the real economy, it’s not what the Federal Reserve would advise, according to a new report released Thursday.
Researchers found that consumer sentiment has become a worse predictor of economic reality over the last several years. In a study linking sentiment surveys to verified retail purchases, the Fed discovered a widening gap between how consumers feel and what they actually do.
Case in point, even though the Michigan survey suggests consumers are worse off than most points in history, Americans continue to buy more today than they did before the pandemic, adjusting for inflation.
Meanwhile, as inflation has collapsed from four-decade highs to 2.4 percent in March, year-ahead inflation expectations spiked to 6.5 percent this month.
The Fed study also found sentiment in recent years has become far more sensitive to price levels than to income growth, a break from historical norms.
“Most consumers over-estimated the extent of inflation they experienced,” the central bank researchers wrote. “For example, 24.0 percent of consumers said they experienced inflation greater than 40 percent, on average, across their everyday retail purchases. Based on verified purchases, we see only 1.7 percent of consumers experienced inflation greater than 40 percent between 2019 and 2024.”
The data suggest that the emotional cost of adaptation is a bigger drag on sentiment than cost of living. Clipping coupons, working more hours, changing shopping habits — these adjustments make people feel worse, even if their financial situation improves.
“Although sentiment improves with higher incomes, the more people said they had to make changes to their behaviors since 2019 to reduce spending, the worse is their sentiment,” the researchers said.
Politics add another wrinkle. Since President Trump took office in January, sentiment among Democrats has cratered while that of Republicans has climbed. Tribalism alone makes it hard to confirm any economic malaise.
To be sure, the Michigan survey and other sentiment metrics still matter. It’s not impossible for gloomy consumer reports to eventually translate to weaker spending.
But the Fed researchers still point to hard numbers that say otherwise. Consumers aren’t retreating just yet. Americans are still buying, renovating, and traveling — even if they aren’t happy about it.
Sentiment surveys track mood, not economic momentum. Feelings aren’t fundamentals, and real-world activity remains much sturdier than media headlines suggest.
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