Wednesdata - Consumer Sentiment

Things continue to be weird

(Note: Wednesdata is a little data exercise. Normally I try and make my own small sets of results. Today, though, I’m going to focus on some weird changes to consumer sentiment)

The University of Michigan Survey of Consumers is widely used to get a sense of how Americans are feeling about the economy. I enjoy following its monthly releases and have noticed some weird changes.

Point 1: Income Divergence

Let’s look at consumer sentiment stratified by income groups (top, middle, bottom third of the income distribution).

Unsurprisingly, higher income folks have more positive economic sentiment than lower income folks. Income strata collapsed to similar levels of pessimism in mid-2022. Since then, there has emerged a large gap in sentiment between more and less affluent folks. The least affluent have remained relatively pessimistic. The most affluent have growing positive sentiment. The gap today is large compared to the last ten years …

… and large compared to the last 50ish years. Look at the gap today between high and low income folks, then eyeball that size back - we have an income gap in sentiment about as large as any other time.

Point 2. Education gaps have returned to normal

Now let’s look at sentiment by education strata:

Look at 2017 to just before the pandemic - low and high educated folks had similar levels of sentiment. That never happened before outside of a recession, and never because the less educated were becoming optimistic more quickly than the more educated. Following the pandemic, a gap between high and low education has re-emerged, with high educated folks with higher sentiment than lower educated folks. The size of the gap between the two looks a heck of a lot like "normal" non-recession times.

Point 3. Current economic conditions - Brutal

The survey splits overall sentiment into two big buckets: current conditions (e.g. how are things going right now) and future conditions (e.g. how do you think things will be in a year). Let’s look at current conditions stratified by income:

Brutal. The bottom and middle third of the income distribution have never been as pessimistic about current economic conditions than today. How about education?

Oof. Brutal. Look at the low educated sentiment, compared to the past 50-ish years. Never been lower. High educated folks were on a rapid recovery until the summer, when sentiment plummeted again. It's around mid-Great Recession levels.

Point 4. Future economic conditions - Hope and change

Let's just look at the long-term trends of expected conditions.

For less educated folks, it just looks like a normal bad time. For high educated folks, it looks like a very-middle time.

How about by income?

Similar! Middling!

When you hear folks talk about the economy, do you often hear the hope and optimism of the future keeping American spirits up? I don't. I hear that people are happy with their current conditions, and their broader views are the things of nightmares. At least for low educated Americans, it seems like the view of the current state of things is dire and the future is brighter.

But it gets a little weird. I looked through the individual items and a few different things seem to be going on.

Point 5. Expected change in real income next year

This is a wild graph—it combines expectations of an expected income change with expectations of a price change. Higher up the y-axis, the expectation is more optimistic.

Lower income folks feel brutally pessimistic about the future. If you look at the pessimism today, it's about as bad as it's ever been recorded, including the Great Recession. High income folks are recovering their optimism. I suspect this income gap helps explain many of the dueling charts and arguments about economic conditions and vibes.

But want to see something wild? Take a look at this same chart using education.

Look at the massive decline of "some college". We've never seen the disordered ranking of education until this year in terms of pessimism.

Point 6. Probability of real income gains

Again, look at lower income Americans. Since the late 1990s, this group has never been more pessimistic of no income gains coming up. Notice too the divergence between the upward / stalling high income (relative) optimism and the plummeting pessimism of the middle and the bottom.

For education, notice the convergence of some college and high school or less. The former always sat between the latter and college. Since the pandemic, it converged with lower education.

Point 7. Why are people optimistic?

The best I can tell, two reasons:

1. People are optimistic that interest rates will come down

Lower income folks less optimistic, but optimism nonetheless

2. People are not expecting continued high inflation.

Point 8. Buying conditions for a house - BRUTAL!

To quote 30 Rock, “Good God, Lemon!!” BRUTAL! Everyone hates it. Nobody likes it.

Interestingly, folks aren't particularly optimistic about the selling conditions of a house.

In total, there are a few things that I notice:

1- Such. Extreme. Polarization in current sentiment. Lower educated and lower income folks are expressing real struggles in their current situation. They don't think their personal situation will get better. The optimism seems to come through the form of lowering interest rates and less inflation expectations. But in terms of kitchen table economic issues, there's a lot of current and future pessimism.

2- I suspect that there's a massive disconnect between people struggling and thriving in the post-pandemic economy, given the basic nature of economic segregation.

3- Prices, big purchase items, and labor market pessimism are really important for folks on the bottom edge of the income distribution. What I'm curious about is how to square this with recent work that shows rising lower incomes. Do people simply not notice or appreciate it? I doubt it - lots of perceptiveness about economic conditions - e.g. gas prices, interest rates, etc. (you can dig through the items at the “Data Site” to see for yourself).

4- Political polarization? With income sorting political partisanship - higher income folks breaking left, lower income folks breaking right - are we just seeing partisan attitudes against the current administration as “income” effects?