The US consumer spending in the Q3 GDP report increased at a mighty 4% annualised pace. 

With the consumer accounting for more than two-thirds of US GDP, it is clear that if the consumer sneezes, the economy catches a cold. But the consumer has not sneezed. At least not so far. In fact, consumer spending in the Q3 GDP report increased at a mighty 4% annualised pace. But that seems odd given that some measures of consumer sentiment suggest that things are at rock bottom.

The University of Michigan consumer sentiment index, for instance has been languishing at levels in recent years that have just about always been consistent with recession. And yet the US has been quite far away from that position. If it seems odd that consumers are very pessimistic, but spending like crazy, there are some possible explanations. And some of these might help determine whether the consumer is about to stall and the economy fall into recession.

The first, rather simple explanation is that the University of Michigan data is simply not very good. But clearly slumps in the survey in the past have been consistent with recession so it can’t be that bad. The answer could be that it is ‘bad’, but only at the moment because it does not take as much account of labour market conditions as the other important consumer survey – the Conference Board Survey – which is not close to recessionary levels at all.

There could be other explanations for why consumer sentiment is bad, but spending strong. One is that confidence in policymakers is very low. Not so long ago we mentioned an annual survey by Gallup that’s carried out to ascertain whether the population is confident in government policymakers and central bank officials. The results were not good.

Fed Chair Powell, for instance, scored lower than any previous Fed Chair in the history of the Gallup polls, while declining confidence in governments seems pretty consistent, with more and more respondents to such surveys arguing that the country is going in the wrong direction. Clearly the recent rise in inflation has been partly responsible for Powell’s unpopularity but, in some senses, these poor scores for the policymakers are strange because the population is actually doing very well, at least financially.

The net worth of households, for instance, has been soaring; hardly dented by the pandemic. This probably explains why consumer spending remains robust, but it is also clear that consumers don’t seem to give the government or the Fed any credit for this. It could be this pessimism towards policymakers’ performance that is keeping consumer sentiment down – at least on the Michigan measure. It is possible that Powell’s score could rise in the next survey now that inflation has come down. But a problem here is that consumers don’t really know what inflation is for the most part.

Instead, what they know more about is the price of the goods and services they are buying. They know that these prices have increased sharply over the past couple of years, which has presumably hit sentiment. The speed of this increase is slowing (the inflation rate is falling) but consumers might not notice this; instead, they might focus on the fact that the prices of the goods and services they are buying are still higher than before, so leaving consumer sentiment in the doldrums.

Add this to the fact that the public has less confidence in the Fed, as mentioned earlier, and it also seems reasonable to think that their expectations for future inflation could be somewhat elevated compared to the past, meaning that depressed consumer sentiment and high inflation expectations go hand in hand. But should we prioritise this weakness in consumer sentiment above the actual data on things like robust consumers spending, low unemployment and elevated household net worth? The Standard Bank doesn’t think so. For this bank, the weakness in consumer sentiment has been – and it likely to continue to be – a red herring.