The bottom line? Subdued sentiment but solid spending
- On the whole, consumers remain a wary group characterized by an increasingly cautious outlook for the economy. They’re also still proving to be resilient, continuing to spend despite weaker labor conditions and persistent inflation concerns.
- That doesn’t mean that consumers are immune to the impact of higher prices; higher-income households still account for a disproportional amount of overall consumption, supported by the wealth effect of rising asset prices. Conversely, lower-income households are trading down and looking for value as they try to make their dollars go further.
- That bifurcation in their respective experiences helps to explain the relative divergence in mood across American households.
By the numbers: Sentiment slipped in September as both components weakened
- The University of Michigan’s Consumer Sentiment Index moderated in September, declining to 55.1 from 58.2 in August. Persistent concerns about the outlook for the economy continue to cloud the collective consumer mood, leaving them on a cautious footing.
- The deterioration spanned both key components of the index, suggesting a more measured assessment of current economic conditions and an increasingly sour outlook for what’s to come in the months ahead.
- The September survey results were among the weakest, going back over seven decades and would be much more consistent with a recessionary environment than an economy that’s coming off a quarter of nearly 4% growth per yesterday’s revised Q2 GDP report from the Commerce Department. Other data suggests that although the economy has likely lost some momentum in recent months, it remains on a solid growth path.
- That seeming disconnect between solid growth and the subdued assessment of the economy illustrates the challenges that still exist and reflects the financial stress on consumers who are disproportionately impacted by food and housing inflation and haven’t benefited from positive stock market performance this year.
Broad thoughts: One index but very different experiences across consumers
- The report comes on the heels of last week’s Fed rate cut, which was well received and is expected to provide a bit of relief for borrowers. However, the survey was completed before the Fed’s announcement, suggesting that the decision, while widely anticipated, likely didn’t influence the outcome significantly.
- The combination of the first rate cut since late 2024 and indications that additional easing may be forthcoming should provide a bit of a boost in the coming months, particularly for those consumers who have felt the pinch of higher interest rates in recent years.
- At the same time, it’s far from clear that lower short-term rates will provide a meaningful lift for the housing market, which remains in the doldrums. The combination of surging home prices and significantly higher mortgage interest rates continue to challenge affordability and restrain activity. Further, mortgage rates aren’t tied directly to the Fed’s short-term policy rate and may not decline to the same degree.
- As easy as it is to focus on a single data point such as the month-to-month swing in sentiment data, the headline number masks an underlying divergence between various groups. The American experience today isn’t uniform.
- The disparity in views highlights key differentiators between those with high stock ownership and those with little or no exposure to equities. Not surprisingly, heavy stock investors who have benefited from the rising stock market have remained more upbeat on a relative basis; those who haven’t experienced the positive wealth effect of rising stock prices have become more pessimistic.
- The index has also revealed the growing divide between both ends of the political spectrum, with those self-identifying as Democrats showing a sharp decline in confidence since the 2024 election, while self-identified Republicans saw their confidence soar. That dynamic was flipped in September, with Democrats seeing a modest lift, Republicans souring modestly, and Independents showing a considerable 9% drop in sentiment. The combination of weaker labor conditions, persistent inflation, and lingering uncertainty about the magnitude and impact of tariffs all play a role.
- Even so, the economy appears to have regained its footing and maintains positive momentum despite a sharp slowdown in job creation. Whether that translates to better job creation in the coming months remains to be seen. The uncertain policy environment isn’t likely to embolden employers to aggressively ramp up hiring, and the sharp decline in immigration has been a considerable headwind to growth in the labor force this year.
- At some point, labor conditions and GDP should converge; the question is whether growth will slow to align with a weaker labor environment or job creation will regain momentum to catch up with consumption growth. The answer to that question will reveal much about the direction of the economy heading into 2026.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
