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Consumer sentiment, by many measures, has been in the dumps since 2021. That might be more understandable to economists if the lower sentiment was connected to deterioration in broader economic measures.
But many of those economic indicators actually show the opposite—that economic conditions are improving. While we won't get to the bottom of who's right and wrong about these economic questions in this analysis, we can show some trends that seem to justify diminished consumer sentiment, as well as some that refute the conclusion that the economy is in bad shape.
A few organizations measure consumer confidence, and all of them indicate persistent declines. The University of Michigan's Consumer Sentiment index is typical: Their survey measures consumer confidence by asking consumers their opinions about both the overall economy as well as their own personal finances today, if they got better or worse in the past year and what their expectations are for each.
Consumer Sentiment Index
Consumer sentiment, while on a nascent upswing, hasn't been at levels that could be considered optimistic since late 2019—just a few months before the COVID-19 pandemic turned the U.S. economy on its head. Similar confidence indexes, such as those fielded by The Conference Board, show similar depressed levels since 2021.
3 Reasons for Pessimism
In the negative column, three indicators seem to be primary drivers for the persistent pessimism:
- Inflation continues to cast a shadow on consumers' moods: More than half the population has no first-hand recollection of persistent inflation, which was last apparent in everyday lives more than 30 years ago—the last time inflation was above 3% over an extended period. And although the latest data shows that inflation has cooled to 3% as of June 2023, it will take more than one month of data to convince many consumers that prices are returning to normal.
Recent Inflation Well Above Average
Even worse: Savings yields are now much lower than they were in the 1990s. Even banks offering top rates on savings accounts barely exceed 4% APY in 2023, compared with rates of 6% and higher when similar levels of inflation occurred in the past. With savings yields low, consumers are less able to use the interest to counterbalance their declining purchasing power.
- Constant rate hikes: The Federal Reserve's response to tame inflation, when it came, was persistent. But the 5 percentage points added to credit card balance APRs certainly started to put a damper on some consumers' spending, or at least their borrowing and spending. Recent data from Bank of America indicates that older consumers—those Experian routinely show to have less debt than other generations—are the only generation spending as much or more as they did in 2022.
Interest Rates Took Off in 2022
- Nothing left to buy, at least at the old prices: While lower-priced goods may have returned to store shelves, inventories for major purchases, like cars and houses, certainly cost the most for households. Short supplies of each meant consumers had to make higher bids for the existing inventory, and likely pay more in interest for the privilege of borrowing.
Partly due to the lock-in effect that higher interest rates for mortgages have caused, there are even fewer homes listed for sale in much of the country in 2023. And auto inventories, while improved, are still below pre-pandemic levels, and cost more to finance than they did before 2020.
4 Shots of Optimism
Here are some signs consumers and households are actually doing better than many think:
- Unemployment rates remain low and show no sign of increasing: The national unemployment rate in May 2023 was 3.7%. The last time the U.S. has seen near-full employment levels like this was in the late 1960s.
Unemployment Rate at 50-year Lows
Wages are also increasing and growing the most for those in the service sector, historically lower-paying than many manufacturing and office worker jobs.
- More money in checking accounts than in prior years: Both high- and lower-income Americans still have more cash in their checking accounts than they did before the pandemic, according to data from Bank of America and JPMorgan Chase.
- People more willing to take investment risks: The percentage of Americans who own stock, according to an annual poll conducted by Gallup, reached 61% in 2023, the highest it's been since the 2008 recession and a significant rise from 2019, when only 55% of Americans reported investing in stocks.
Percentage of Americans Who Invest in Stocks
- Consumer credit continues to improve: The upturn in investments somewhat resembles the improvement in FICO® Scores☉ over the same period, when the average credit score increased by four points from 2019 to 2022. Improving credit profiles allow consumers to access loans and funds at better rates than they may have otherwise received, key in an economy still feeling the roils from inflation.
Average FICO® Score in the U.S.
"I'm OK … It's Everyone Else Who's in Trouble"
The Federal Reserve conducts the annual Survey of Household Economics and Decisionmaking to check up on how Americans are managing their daily finances. Although the results are broad and very general, it gives policymakers and others an idea about how current macroeconomic conditions are affecting consumers.
Percentage of Heads of Households Reporting They're Doing "at Least OK" Financially
Unlike other sentiment indicators, for the most part, heads of households say they're still doing "at least OK financially" as they were during the pandemic, and certainly better than 10 years ago.
But that doesn't quite jibe with the gloomy outlook many consumers still perceive. Either consumers have incredibly high esteem about their personal finances relative to how they perceive others are doing or, perhaps more likely, are perceiving all these marketplace disruptions—encompassing everything from expensive cars to disrupted commutes to shortages—as a net negative.
Methodology: The analysis results provided are based on an Experian-created statistically relevant aggregate sampling of our consumer credit database that may include use of the FICO® Score 8 version. Different sampling parameters may generate different findings compared with other similar analysis. Analyzed credit data did not contain personal identification information. Metro areas group counties and cities into specific geographic areas for population censuses and compilations of related statistical data.
FICO® is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.