The University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index both showed sharply depressed readings through 2022-2024, yet consumer spending continued to grow. This divergence confused a lot of analysts who assumed sentiment and spending should move together. They do not have to, and understanding why is important.
Consumer sentiment surveys ask people how they feel about the economy and their financial situation. Consumer spending data measures what they actually do with their money. These are fundamentally different things. People can feel terrible about the economy while continuing to spend because their income is growing, their employment is secure, and credit is available.
Inflation perception has been a major driver of the sentiment-spending gap. Consumers report feeling worse about the economy when prices are high, even if their real spending power has been maintained or increased through wage growth. The psychological impact of seeing higher prices at the grocery store weighs on sentiment surveys disproportionately relative to its actual impact on spending capacity.
Political polarization has introduced a structural distortion into sentiment surveys. Studies have shown that consumer sentiment responses are increasingly influenced by which party controls the White House, independent of actual economic conditions. This partisan filter makes sentiment surveys less reliable as economic indicators than they were in prior decades.
The Conference Board survey tends to be more reliable for spending predictions than the Michigan survey, primarily because it includes questions about employment conditions and business conditions that are more closely tied to actual economic behavior.
For markets, the practical question is which measure to trust when they diverge. The historical evidence suggests spending data is more reliable for predicting GDP growth, while sentiment data is more useful for predicting political outcomes and can occasionally flag turning points in spending with a lead of one to two quarters.
The savings rate adds context. When consumers feel pessimistic but keep spending, the savings rate often declines, meaning they are drawing down buffers. When the savings rate drops below 3-4%, the capacity to maintain spending in the face of negative sentiment becomes limited. At that point, sentiment and spending are more likely to converge.
A more useful approach than watching either metric in isolation is to track the gap between them. A wide gap is unstable and tends to close. The question is always which direction it closes: does sentiment recover to match spending, or does spending deteriorate to match sentiment? The answer usually depends on whether the labor market holds up.