Recent readings of consumer confidence are revealing an increasingly bifurcated economy as households continue to grapple with the pandemic.
The economy can be divided into two camps, the surveys show: one of scarcity and one of abundance.
The economy can be divided into two camps, the surveys show: one of scarcity where prices are rising and employment remains a challenge, and one of abundance where rising prices present a modest impediment to economic decisions for households flush with cash.
To the extent that consumer sentiment affects spending and life decisions, this divergence adds to our assessment that the economy is in a period of abundance with pockets of discontent and scarcity.
Not surprisingly, the quantitative evidence reveals weaknesses in the data. The University of Michigan survey of consumer sentiment is highly sensitive to volatility in gasoline prices, while the Conference Board’s survey of consumer confidence reflects movements in the unemployment rate and inflation-adjusted gasoline prices.
When a third survey, the Langer consumer comfort survey, is included, there is a strong negative relationship between the unemployment rate and the top-line reading of sentiment.
The bifurcation of the national economy and the accompanying political polarization create a condition in which the surveys provide a somewhat misleading portrait of national sentiment and overemphasize single factors like volatile gasoline prices or normative ideological preferences, our analysis shows.
The divergence among the three U.S. national consumer confidence indices has become more pronounced recently.
Firms making investment decisions and policymakers should approach the information in these surveys with a healthy skepticism.
To a certain extent, this is not new. There has been a divergence among the three U.S. national consumer confidence indices for well over a decade, and that divergence has become more pronounced recently.
But the gap between the University of Michigan’s survey and those by the Conference Board and Langer Research Associates (formerly the ABC/Washington Post survey) became more pronounced in 2021.
We attribute this gap to differences in income and lifestyles that are proxied by regional demand for gasoline, as well as the starkly different policy and philosophical preferences among regions that are evident in the national political and economic conversation.
The pandemic era
The three major surveys seek to take the pulse of a population that has been dealing with a public health crisis for nearly two years. It is highly likely that some of the recent volatility in consumer sentiment surveys is a reflection of the weariness over the pandemic—most recently the omicron variant—and has little to do with the current business cycle.
Yet as our econometric analysis shows, there is more to recent trends in sentiment than just pandemic fatigue.
After collapsing in March 2020, the indices steadied as local economies reopened and the indices then began to move higher during the last months of the year. But the University of Michigan survey peaked in January 2021, while the improvement in surveys by the Conference Board and Langer Research continued to accelerate, peaking six-months later in midsummer.
The University of Michigan’s survey began to slide just as gasoline prices started to move above recent norms. This was occurring just as the Conference Board and Langer surveys were suggesting increased confidence, buoyed by the distribution of effective vaccines.
To find out what is going on, we tested the degree to which movement in the three surveys could be explained by conditions in the labor market and by the price of gasoline.
The first assumption we make is that household finances are directly related to the labor market and therefore to consumer sentiment. When times are tough, household finances are stressed, and that has a direct impact on consumers’ propensity to spend.
For the United States as a whole, our analysis shows a strong negative relationship between the unemployment rate and an average of the three consumer confidence indices.
The second assumption is that gasoline prices are the most accessible indicator for consumers to judge the state of the economy and the health of their household balance sheets.
The relationship between gasoline prices and overall consumer sentiment varies across surveys, more so than their relationship with the unemployment rate, our analysis shows.
The University of Michigan and Langer surveys are more sensitive to variations in gas prices than the Conference Board survey on a national basis.
Interestingly, a further analysis indicates that consumer sentiment is considerably more sensitive to the variation to the real (inflation-adjusted) price of gas, perhaps suggesting the impact of inflation and the lack of wage growth for certain segments of the population
This is where things get interesting. Our econometric analysis of the surveys shows the effects of political affiliation and regional differences on consumer sentiment.
The breakdown in the commonality among the three surveys goes back well over a decade. It took until 2017, however, before the schism became pronounced. Just when Democrats thought things might be going badly in 2017, Republicans thought the opposite.
Our econometric analysis suggests that Republicans surveyed by the University of Michigan react more strongly to both variation in nominal (and real) gas prices and the unemployment rate than Democrats. Those findings were confirmed by the Langer survey.
Our analysis also shows a regional component to consumer attitudes as measured by the University of Michigan and Langer indices, with gasoline prices more important for residents of the South and Midwest than for residents in the Northeast and West.
That makes sense with respect with commuters in the large metropolitan areas having access to public transportation, while residents in the South and Midwest would be more likely to be reminded of the rising cost of filling up their tanks.
There are other demographics that need to be considered. For instance. the University of Michigan and Langer Research surveys suggest that higher levels of educational attainment and household income are consistently associated with higher levels of consumer sentiment.
A study by the New York Times indicates that older people are more concerned about inflation (proxied in our analysis by gasoline prices) than younger people, that households that earn the least are concerned about inflation the most, that people in the South and Midwest in 2021 anticipate higher inflation more than those in other regions, and that people with college degrees generally have lower expectations for inflation than those with less education.
The rapid acceleration of economic and social changes across the United States has eroded the value of such surveys. They most likely reflect overdetermined evaluations of national economic conditions based on normative preferences rather than the true underlying condition of local, regional or national economies and present misleading portraits of national sentiment.