Economists \u2014 and \u201cMarketplace\u201d listeners \u2014 know that consumer spending drives around two-thirds of the economy. And historically, there has been a pretty close relationship between sentiment or confidence and consumer spending.<\/p>\n
But that relationship weakened significantly at the start of the COVID-19 pandemic and hasn\u2019t fully recovered in the six years since. Scott Brave, senior economist and economic advisor at the Federal Reserve Bank of Chicago, published a Fed letter<\/a> on this change.<\/p>\n Consider the two primary ways to keep track of how Americans are feeling about the economy: the University of Michigan\u2019s Surveys of Consumers<\/a> and The Conference Board\u2019s consumer confidence index.<\/a> Since the pandemic, consumers have been feeling pretty consistently negative about the economy. The most recent Michigan consumer sentiment index was up<\/a> from an all-time low in May, but still pretty negative due to the Iran war and oil prices. <\/p>\n \u201cIf I were to put those low levels of consumer confidence or sentiment into a model, the model will tell me, \u2018Oh my god, consumer spending is going to be, like, down below the earth,\u2019\u201d said Ernie Tedeschi, chief economist at Stripe. <\/p>\n But consumer spending is mostly fine. It was actually up almost 1%<\/a> in May, the same month that consumer sentiment reached that all-time low. <\/p>\n So what\u2019s driving the gap between how consumers feel and how they\u2019re spending? <\/p>\n It\u2019s a big subject of debate for economists. Theory number one is vibes. <\/p>\n \u201cReally what\u2019s going on, I think, is inflation, high prices, affordability, however you want to put it,\u201d said Tedeschi. <\/p>\n Remember: Inflation as measured by the consumer price index hit 9% in June 2022<\/a>. That\u2019s the largest annual increase since the 1980s. <\/p>\n \u201cConsumers have memories, so even as growth in prices has gotten better, they go to the grocery store and see persistently high levels of eggs, produce, whatever,\u201d Tedeschi said. \u201cAnd that is keeping their attitudes weak and low over this whole time.\u201d <\/p>\n Theory number two about the gap between feelings and spending is specific to the Michigan consumer sentiment index.<\/p>\n \u201cThe survey used to be conducted by phone. And then in early 2024, they gradually transitioned to collecting all of their information online,\u201d Tedeschi said. \u201cPeople tend to be materially more negative when they answer things online, and we saw that immediately with the University of Michigan survey.\u201d <\/p>\n Tedeschi and economist Ryan Cummings analyzed this change and found that sentiment was 11% lower<\/a> than it would have been if the survey were still conducted over the phone. <\/p>\n This could help explain why sentiment has stayed low, making the correlation between sentiment and spending weaker than it was pre-COVID. <\/p>\n \u201cFrom an economic standpoint, we have seen empirically that the economy grows just fine throughout these negative vibes,\u201d Tedeschi said. <\/p>\n