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  • Take a moment to consider your financial situation.

  • Are you better or worse off financially than you were a

  • year ago? How about a year from now?

  • Where do you see the country headed in the next

  • five years? These are just some of the questions used

  • by the University of Michigan to calculate the

  • Consumer Sentiment Index, an economic indicator

  • measuring how people feel about the economy.

  • It's a measure that we can compare over time and get a

  • pulse on the attitudes of consumers, which is

  • important given that consumer spending is over

  • two thirds of GDP.

  • But there's a pervading sense of disconnect between

  • the overall economic picture and how people feel

  • about the economy.

  • Despite declining inflation, a healthy labor

  • market with record low unemployment, as well as

  • stocks that remain in a bull market, consumer

  • sentiment remains below pre-pandemic levels.

  • When people are sort of asked almost anything about

  • the economy, they react in a very sort of visceral way

  • that everything is lousy, even though there's a fair

  • bit of evidence that bit by bit, things are getting

  • quite a little bit better.

  • And it's not just consumer sentiment levels that have

  • been at odds with strong economic data.

  • In a New York Times/Siena College poll conducted in

  • February, 40% of respondents said the economy

  • was worse than it was a year earlier, versus only

  • 23% who said it was better for consumers.

  • When they tell us that they're feeling like the

  • economy is average, that is their experience because

  • their experience is not necessarily being driven by

  • macroeconomic indicators.

  • So why hasn't consumer sentiment matched up with

  • the economic reality?

  • And what are some of the factors behind the

  • disconnect, and why the issue could play an outsized

  • role in this year's US presidential election?

  • The surveys of consumers at the University of Michigan

  • have been measuring consumer sentiment since

  • 1946, and on a monthly basis since 1978.

  • It's based on a number of questions about personal

  • finances, business conditions, as well as

  • buying conditions for durables both right now and

  • for their expectations for the future.

  • And taken together, what research has shown is that

  • it captures very well how people feel about the

  • economy, which feeds into how they make economic

  • decisions going forward.

  • Current sentiment levels, released in April of 2024,

  • show that sentiment has remained steady since the

  • start of the year, hovering at around the half way point

  • between all time low levels from June of 2022, during

  • the height of inflation and pre-pandemic levels.

  • I think what we we can definitely say about how

  • consumers feel about the economy is that their

  • impressions of the economy aren't being driven

  • necessarily by the official GDP release, by the official

  • unemployment rate or the official inflation rate.

  • And so one reason that you see this disconnect is

  • because it's not affecting the average consumer the

  • same way that it's affecting the global

  • economy.

  • But beyond consumers not reaping the rewards from the

  • strong economic data, in some cases their views of

  • the economy stand in direct contrast with the data

  • itself. In fact, in a Wall Street Journal poll

  • conducted in February of 2024, 68% of Americans

  • surveyed said inflation had moved in the wrong direction

  • in 2023, despite data showing otherwise.

  • People don't tend to think in terms of inflation.

  • Economists do. But economists are not normal.

  • Normal people think in terms of price levels.

  • Consumers are, I would say, well connected with what's

  • going on in the macro economy, but they don't

  • necessarily internalize every piece of good news as

  • a favorable factor for them.

  • For them, inflation is top of mind and is really

  • underpinning, um, a lot of their overall views.

  • So one of the problems that we've got is consumers are

  • just useless at forecasting inflation, I'm afraid.

  • And that's because of something called frequency

  • bias.

  • In an op-ed for The New York Times, economist Paul

  • Donovan argues that while consumers tend to forget the

  • price of less frequently bought, more expensive

  • items, they are much more likely to remember the price

  • of lower priced, frequently bought goods.

  • And that's a real problem at the moment, because when we

  • look at the composition of inflation, particularly in

  • the United States, durable goods prices.

  • So televisions, furniture, consumer electronics,

  • they're falling. But nobody remembers that fact.

  • However, every time you go to a vending machine to buy

  • a Snickers bar, you remember the fact that that

  • price has gone up because it used to be this price,

  • and now it's this price.

  • And so that sort of sticks in your mind, and that

  • creates this illusion that inflation is higher than it

  • actually is.

  • While overall inflation levels have been steadily

  • declining over the past year, the cost of so-called

  • high frequency purchases, namely food and gasoline,

  • have remained stubbornly high.

  • Even though a coffee or the things that we buy at the

  • grocery store on an absolute level for each

  • individual item may not compose that much of our

  • spending, it is more salient and accessible in

  • our minds because we do it more readily.

  • Every time I go and buy a cup of coffee, every time I

  • buy a chocolate bar, I am being reminded that the

  • price level is higher and that just sort of sentiment

  • sticks in your mind and creates this negative

  • perception.

  • Additionally, because we do them more regularly, we're

  • more likely to have what we call a reference price in

  • our mind for them, when it's something that we buy

  • on a very regular basis, we have a more solid idea of

  • how much we typically pay for this good.

  • And so when the current price is significantly

  • greater than that, it feels more expensive.

  • And that is what sort of hammers away at your your

  • mental perception of inflation.

  • Because every single time you're being reminded that

  • prices are going up.

  • If we look back on how inflation was described to

  • us back in 2020, 2021, people talked about it as

  • being transitory and they would use the words, you

  • know, we expect inflation to go down in the near

  • future. And they.

  • Have. So what the United States has been experiencing

  • overall for the for the last year and a half is

  • disinflation. Overall prices are still rising, but

  • they're generally rising a lot more slowly than they

  • were 12, 18 months ago.

  • If you're going to the store and you're used to buying

  • milk for $4 and you experience 25% inflation, it

  • would mean that the price would increase by a dollar,

  • right? So a dollar out of those $4, 25%.

  • So it might go up to $5.

  • And so the price is going up.

  • It may be going up more slowly than it's done in the

  • past, but it is still going up.

  • But what the average American hears when they

  • hear that inflation will go down is that the price is

  • going to come back down to what they expected.

  • What consumers want, emotionally at least, is

  • deflation. They want prices to be coming down.

  • And so you naturally say, well, you know, prices are

  • going in the wrong direction. So obviously

  • inflation is going in the wrong direction.

  • But that's confusing to different concepts.

  • And so I do think that the average consumer is

  • frustrated when they're going to the grocery store,

  • and especially for these frequently purchased goods

  • that they're seeing prices that are the same or

  • slightly more than they were last year, when they're

  • expecting that it goes back down.

  • And that creates, I think, quite a lot of the tension

  • when economists are saying, oh, things are getting

  • better on inflation, and consumers don't really

  • believe economists because they're hoping for

  • deflation.

  • And so I think consumers, it's been taking them a

  • while to really internalize that.

  • And they're continuing to tell us that even though

  • they've noticed that inflation has slowed and

  • they expect inflation to continue slowing, high

  • prices still weigh on them.

  • Part of the disconnect can also be chalked up to the

  • growing partizan divide in the US, particularly when it

  • comes to how Democrats and Republicans each differ in