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Sentiment, shmentiment

American consumers feel like a recession is on the way, but the actual economy hasn’t got the memo yet.

The University of Michigan’s latest consumer sentiment index fell to 52.2 for April, down 8% from March and 32% from a year ago. Meanwhile, trade war and inflation concerns have dragged the economic expectations index down 32% since January, the sharpest three-month dip since the 1990 recession. 

As tempting as it may be to use the survey to draw conclusions about the real economy, it’s not what the Federal Reserve would advise, according to a new report released Thursday. 

Researchers found that consumer sentiment has become a worse predictor of economic reality over the last several years.

In a study linking sentiment surveys to verified retail purchases, the Fed discovered a widening gap between how consumers feel and what they actually do.

Case in point, even though the Michigan survey suggests consumers are worse off than most points in history, Americans continue to buy more today than they did before the pandemic, adjusting for inflation. 

Meanwhile, as inflation has collapsed from four-decade highs to 2.4% in March, year-ahead inflation expectations spiked to 6.5% this month.

Indeed, the Fed study found sentiment in recent years has become far more sensitive to price levels than to income growth, a break from historical norms. 

“Most consumers over-estimated the extent of inflation they experienced,” the central bank researchers wrote.

“For example, 24.0 percent of consumers said they experienced inflation greater than 40 percent, on average, across their everyday retail purchases. Based on verified purchases, we see only 1.7 percent of consumers experienced inflation greater than 40 percent between 2019 and 2024.”

The data also suggest that the emotional cost of adaptation is a bigger drag on sentiment than cost of living. Clipping coupons, working more hours, changing shopping habits — these adjustments make people feel worse, even if their financial situation improves. 

“Although sentiment improves with higher incomes, the more people said they had to make changes to their behaviors since 2019 to reduce spending, the worse is their sentiment,” the researchers said.

Politics add another wrinkle. Since President Trump took office in January, sentiment among Democrats has cratered while that of Republicans has climbed.

Tribalism alone makes it hard to confirm any economic malaise.

To be sure, the Michigan survey and other sentiment metrics still matter. It’s not impossible for gloomy consumer reports to eventually translate to weaker spending. 

But the Fed researchers still point to hard numbers that say otherwise.

Consumers aren’t retreating just yet. Americans are still buying, renovating, and traveling — even if they aren’t happy about it.

Sentiment surveys track mood, not economic momentum.

Feelings aren’t fundamentals, and real-world activity remains much sturdier than media headlines suggest.

Market snapshot

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Elsewhere

🌍️ Investors are shifting to emerging markets. Traders have turned their attention beyond the US as the Trump administration navigates its trade war and sends the US dollar to multi-year lows. Developing economies, though, have flourished, with local currency bond returns surging. (Bloomberg)

📊 Hedge funds have sold while retail has bought the dip. The recent market turmoil has seen institutions sell $1 trillion in shares this year, while 97% of Vanguard 401(k) investors avoided trading in April. Retail’s commitment to stocks is notable, and contrasts with the heavy selling during 2020. (WSJ)

Rapid-fire

• Earnings come due this week from Microsoft, Apple, Meta and Amazon (Bloomberg)

• The second Trump administration has ushered in a flurry of crypto deals (WSJ)

• Google’s blowout earnings could revive the rest of the Magnificent 7 (Opening Bell Daily)

• China’s Huawei is developing a new AI chip seeking to compete with Nvidia (Reuters)

• Plane tickets are getting cheaper as domestic travel demand weakens (CNBC)

• Warren Buffett is still at the top of his game at 94, but questions of succession loom large for this week’s shareholder summit (Barron’s)

• Private equity real estate owners have abandoned souring office deals, leaving zombie buildings across major metros (WSJ)

Last thing

About me

📰 I’m Phil Rosen, co-founder and editor-in-chief of Opening Bell Daily. I’ve published books, lived on three continents, and won awards for my journalism, which has appeared in Business Insider, Fortune, Yahoo Finance, Bloomberg and Inc. Magazine.

I write our flagship newsletter to prepare you for each trading day, unpacking markets, economic data and Wall Street with analysis you won’t find anywhere else. Feedback? Reply to this email, ping me on X @philrosenn, or write me directly at [email protected].