What Consumer Sentiment Says About the Economy

While the economy has remained strong, not everyone is feeling that strength.

Recent consumer sentiment surveys show there is a gap between the economy’s continued strength and how households feel about their personal financial situation. The latest data from the Conference Board’s Consumer Confidence Index and the Michigan Consumer Sentiment Index show people are still struggling with inflation and high interest rates, while also worrying more about their jobs. 

The next release of the consumer sentiment index, which fell for the fourth consecutive month in July, is due on Friday. The next consumer confidence reading will be released on August 27.

Investopedia recently spoke with Oren Klachkin, a financial market economist at Nationwide, about what these measures tell him about the economy and where he’s focusing his attention. The interview below has been edited for brevity and clarity.

INVESTOPEDIA: What are the differences between these two surveys of consumer perceptions?

OREN KLACHKIN: So the main difference is that consumer sentiment is a lot more sensitive to inflation, and consumer confidence is more sensitive to the labor market. 

In the post-pandemic era, sentiment has been weighed down a lot by the high inflation environment that we’ve been in since the pandemic happened. And confidence has been more exposed to what’s been happening on the labor market front.

INVESTOPEDIA: What are the two main surveys telling us now?

OREN KLACHKIN: It’s becoming evident that the weight of high prices and high interest rates is increasingly weighing on consumers’ thoughts. That is becoming more visible as the labor market is starting to show more signs of being softer. 

And so as that labor market softens, the income side of the equation won’t be able to offer as much of an offset to high prices and high interest rates as it has been. 

Consumers are now thinking that they’re going to spend less on big-ticket expensive things. They’re also going to go on fewer vacations and do less discretionary spending. And I think all that is tied to the fact that income growth is getting softer, but interest rates are still high.  The cost of stuff is still very high. 

INVESTOPEDIA: Are there any of these particular indicators within the surveys that you are specifically following? And if so, what can they tell us?

OREN KLACHKIN: The measures of the current situation have become more negative, for lack of a better word, and become more downbeat. Again, consumers think that things are getting worse, essentially, right now. But they still have, I would say, relatively encouraging expectations in terms of what lies in store for the economy in the second half of this year and into next year. 

So I’m watching that gap between current conditions and expectations especially closely. There’s some evidence that shows that basically, the gap between current conditions and expectations can provide somewhat of a leading indicator on the economy overall. I’m watching that pretty closely. 

And then also, within the respective reports, there are underlying series that talk about consumers’ plans on what they’re going to spend on big-ticket things like cars, houses, and also if they’re going to go on vacations, trips, and things like that. I will say that both the confidence and the sentiment data at the macro headline level has not really been a super good indicator on spending. 

INVESTOPEDIA: Why are these surveys important? And what can they tell us about the economy?

OREN KLACHKIN: Essentially, they offer us an indication as to consumer spending intentions, a barometer on the consumer. But we also need to consider the real data, the hard data, that we have on the economy. The jobs report is one, inflation, obviously a super important one, interest rates. All these key real factors are very important. 

And I say that because consumers’ intentions, or consumers’ thoughts on the economy, don’t always translate into their spending choices. That was very apparent in the aftermath of that pandemic. Attitudes, in general, were pretty negative. Consumers continued to go out and shop, spend money, go on vacation, things like that. So we need to look at it in the aggregate.