The two main surveys of how people feel about their financial well-being – Consumer Confidence and Consumer Sentiment – typically move along roughly the same path. Right now they’re both high, which is good, considering about 70 percent of the economy depends on consumer spending. And if we’re feeling good, we tend to spend more.
But about a year ago they started to split – and that says a lot about our current situation.
While Consumer Confidence and Consumer Sentiment are often used interchangeably, they ask different questions.
The Consumer Confidence Index focuses more on how people feel about the jobs situation.
The Consumer Sentiment Index is more about people’s financial situations. Each survey asks five questions, and boils them down into an index.
So what are the surveys telling us? Here are a few facts:
- Conducted by The Conference Board, a not-for-profit business group
- About jobs
- Is accurately reflecting today’s low unemployment rate
- Questions ask about:
o Current employment
o Prospects for employment in six months
o Expected income in six months – which can also be seen as confidence that you’ll have a job.
Losing a job is tough to deal with. But having a job and prospects for that job continuing is naturally going to cause optimism and juice the Consumer Confidence number.
- Conducted by The University of Michigan
- Doesn’t ask about employment, but does ask if those surveyed think there could be widespread unemployment or depression in the next five years
- Mainly about finances
- Key questions ask:
o “Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?”
o “About the big things people buy for their homes – such as furniture, a refrigerator, stove, television and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?”
Even though the unemployment rate is low, many of the jobs added are low-paying. This means consumers may still be struggling financially even if they’re employed. Retail spending isn’t great, and as a result, Consumer Sentiment hasn’t increased much over the last 2.5 years.
There’s a contradiction in these surveys. Consumers’ positive feelings about the economy and their own financial situations haven’t translated into higher spending. Rather, the surveys may signal people expect to spend more, given the economy is doing okay.
However, both indexes are high. Consumer Confidence is at its highest level since 2000. Likewise, the Sentiment Index through the first 8 months of this year is the highest it’s been since 2000. Richard Curtin, the survey’s chief economist, attributes this to low unemployment, inflation and interest rates, as well as rising home values and stock portfolios.
But as powerful as those factors are, Consumer Confidence has moved higher relative to Consumer Sentiment, given the availability of jobs.
The Political Divide
But there’s another dimension to the Consumer Sentiment survey that makes it especially relevant these days. Part of the Consumer Sentiment survey asks respondents if they lean Democratic or Republican. In a recent survey, 84 percent of Republicans saw favorable economic developments regarding jobs and policies, versus 37 percent of Democrats. This perception gap is the widest it’s ever been, according to Curtin.
Both surveys saw a bump after the 2016 Presidential election. But the Consumer Sentiment index has drifted down a bit since then. It’s been said that both Consumer Confidence and Consumer Sentiment peak, and then drop before a recession. So is a downturn on its way given both are so high?
Thankfully, no. Consumer Sentiment would need to take a determined dip to indicate a recession is coming, says Curtin. And again, both only have some value in predicting the economy.
On the other hand, they are 100 percent accurate in forecasting consumers’ mindset in the recent past (hindsight being 20/20). Understanding the past helps us get a handle on consumer attitudes in the next three to six months.
Although unlikely – if both post several consecutive down months, we may be closer to a recession than we think. But right now, an increase in the Consumer Sentiment number is a sign family finances are improving. If Consumer Confidence rises, it means the job market is getting even better. An increase in both would raise our confidence levels to a peak we haven’t seen since the late 1990s.
Consumer Confidence (yellow) and Consumer Sentiment (white)