The bottom line? Disconnect between macro data and aggregate mood reflects income divide
- Consumer sentiment has continued its downward trend this fall, sitting well below long-term averages and near historic lows.
- The average consumer is feeling the squeeze from many angles, including rising prices, a tough housing market, slower job creation and lower wage gains, and rising interest rates. Add it all up, and many households are still trying to find their footing, despite macro data that suggests that the economy is still on a solid growth path.
- Above all else, the sentiment survey shines a light on the underlying economic reality — one that looks solid based on macro data but is being experienced very differently by households that are still adjusting to higher prices for food, housing, and other staples, leaving less capacity for discretionary spending.
By the numbers: Modest uptick in sentiment in November doesn’t erase its sharp decline this year
- The University of Michigan’s Consumer Sentiment Index edged up to 51.0 in the second November reading, a fractional uptick from the 50.3 preliminary reading earlier in the month. The end of the federal government shutdown appeared to provide a modest boost, alleviating one significant source of uncertainty.
- At best, the uptick represented a modest reversal of the downward trend that has held since early this year, with the sentiment index falling steadily from its 74.0 reading in December 2024. The erosion in consumer confidence throughout 2025 has been steady and steep as the index has fallen by more than 30% since last December.
The collective mood doesn’t match the macro reality, but does reflect a growing divide
- The fact that the University of Michigan’s sentiment reading for November reaffirms that consumers are extremely pessimistic wasn’t a surprise. What still seems seemingly hard to square is that the index level is only modestly above its record low point at a time when macro measures of the economy are varied, but generally good.
- Growth is solid, inflation has receded considerably, and the labor economy is still generating new jobs, albeit at a much slower pace.
- That doesn’t mean that consumers, particularly those starting their careers, aren’t worried about their job prospects. Many recent college graduates have struggled to find opportunities in their chosen fields, a dynamic that’s been exacerbated as some employers that went on hiring binges a few years ago have shifted to trimming their workforce via attrition if not outright cuts.
- Clearly, it’s not an economy that’s firing on all cylinders, but the general consumer unease seemingly reflects other factors that aren’t readily apparent in the overarching macro data.
- Inflation has receded, but consumers are still adjusting to the sticker shock of surging prices over the past several years. For households still trying to absorb higher prices for housing and food, let alone other goods and services, any inflation is still tough to swallow.
- There’s also a pronounced disparity in mood that breaks hard along political lines, with self-identified republicans expressing a notably more optimistic outlook than either democrats or independents. That disparity likely reflects differences in financial positions and economic considerations but also likely mirrors the acute and growing political divide within the country more broadly.
- The subdued outlook also likely reflects the effects of the so-called “K-shaped” economy, with lower- and some middle-income households feeling the lingering pain of surging prices and economic disruption to a greater degree than higher-income households — a reality that’s not readily apparent in the macroeconomic data.
- The stock market also matters, particularly for those whose financial strength is more heavily influenced by their investment portfolio. Not surprisingly, this year’s solid gains have made higher prices easier to absorb for those with substantial financial assets.
- Boil it all down, and there’s a notable mismatch between much of the economic data (which remains solid) and the sentiment survey, which more closely resembles what would be expected in a severe recession.
- What this means for near-term consumption remains to be seen. To this point, consumers have been able to increase spending, helping to underpin growth this year. The growing risk is that consumers, who’ve continued to spend while staring down higher prices, at some point, blink.
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