Worst Ever Consumer Sentiment: Signal For Economic Collapse? | Joanne Hsu

Joanne Hsu, Director of the Surveys of Consumers at the University of Michigan, discusses the state of consumer sentiment in the U.S. economy. Despite May 2024 marking an all-time low in sentiment, recent months showed improvement with gains exceeding 10% in June and July, though sentiment remains 11% below year-ago levels. Hsu emphasizes that the comparison to 2022's low is not surprising given high inflation then versus current income uncertainty now.

The conversation explores why stock market performance hasn't improved consumer sentiment. While wealthy consumers with significant stock holdings have felt better due to market gains, lower-wealth consumers—who own little to no stock—remain unmoved. Hsu argues this disconnect reflects the concentration of recent stock market gains in a small number of AI-related firms, which doesn't translate to broad-based economic improvement for most Americans.

The core consumer sentiment index comprises five questions: financial status year-over-year, expected financial status one year ahead, short-term (1-year) business conditions, long-term (5-10 year) business conditions, and whether now is a good time to buy major household items. Personal finances and business conditions have been the areas showing the most downward pressure. Hsu explains that consumers evaluate these questions based on their lived experiences, not detailed financial analysis—retirees consider cost-of-living changes, workers assess job security and raise prospects, and prospective homebuyers factor in mortgage rates.

Inflation emerges as the dominant factor influencing sentiment. Consumers consistently cite high prices and cost-of-living as the primary concern, marking a paradigm shift from the pre-pandemic decade when inflation was so stable it barely featured in consumer discussions. Hsu distinguishes between consumers' stated desire for deflation and actual economic deflation (which brings negative consequences), arguing that sustained disinflation—gradually falling prices—is what consumers actually need to restore confidence.

Artificial intelligence mentions in consumer surveys have risen from 1.6% to 11% but remained flat since March. Consumer commentary on AI is mixed: some see positive productivity gains and stock market support, others fear job losses and layoffs, while still others worry about data center impacts on electricity costs and environmental effects. On balance, Hsu notes AI sentiment appears negative.

Geopolitical factors like the Middle East conflict and Strait of Hormuz closure affect sentiment primarily through energy price impacts, not through direct geopolitical concern. Consumers focus on the economic consequences (gas prices) rather than the conflict itself. This distinction explains why sentiment gains in June and July may be difficult to sustain without stable energy prices.

Hsu references her 2022 research paper showing that consumer confidence in macroeconomic conditions drives portfolio allocation to risky assets, separate from financial literacy and risk preferences. This suggests sentiment data provides valuable signals for investment decisions beyond policy-making.