Synopsis
Despite an unexpected increase in spending, US consumer sentiment is showing a notable decline. Economists are delving into the underlying reasons for this paradox, with factors beyond economics, such as global events and trust in institutions, playing a critical role. Additionally, consumers are adapting their spending patterns, placing greater emphasis on larger purchases while neglecting smaller ones, which complicates traditional economic assessments.
US consumer sentiment is cratering but, oddly enough, spending is barrelling on. This has perplexed economists who are ascribing a variety of factors for this divergence. The latest insight is offered by Goldman Sachs, which claims non-economic factors have led to unusually high pessimism since the Covid epidemic. Other views agree that happiness and financial well-being are decoupling in the US. Consumers have become sceptical about world affairs even though their incomes are rising. And they don’t have faith in institutions to set right all that is affecting the world. That can be read as the failure of political leadership, and it won’t be too far out of line under a second Trump administration.
The proximate factors affecting consumer spending are inflation and the cost of living, job market stability, household indebtedness and interest rates, and the level of savings. A wider set of parameters defines consumer sentiment, which includes whether newspaper headlines are particularly grim about economic prospects, the popularity ratings of incumbent governments, and trust in public institutions. This second set of non-economic variables appears to consistently override the economic determinants of consumer sentiment that the University of Michigan has been tracking since 1946. It could possibly explain why consumer sentiment has not recovered to its pre-pandemic level.
Other explanations abound. McKinsey suggests that consumers are economising on lower-value purchases and splurging on big-ticket items like holidays and gizmos. One way to get a hang of the consumer’s mind would be to break them into smaller groups by age, income and other relevant metrics. This might paint granular pictures that can be scaled up into a population-wide indicator. Otherwise, the US consumer sentiment index will incongruously dwell at levels that have traditionally signalled oncoming economic crises. That doesn’t serve much purpose as an indicator. Particularly an indicator that the rest of the world tracks.
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