4 Questions with an Economist: What Consumer Sentiment Says About the Economy

Although the economy is still strong, not everyone feels that strength.

Recent consumer opinion surveys show that there is a gap between the ongoing economic strength and how households feel about their financial situation. The latest data from the Conference Board’s Consumer Confidence Index and the Michigan Consumer Sentiment Index show that people are struggling with inflation and high interest rates, while also worrying about their jobs.

The next flow of the consumer sentiment index, which fell for the fourth consecutive month in July, should be done on Friday. The next consumer confidence index will be released on August 27.

Investopedia recently spoke with Oren Klachkin, a national stock market economist, about what these measures tell him about the economy and where his focus lies. The discussion below has been edited for brevity and clarity.

INVESTOPEDIA: What is the difference between these two consumer opinion surveys?

OREN KLACHKIN: So the main difference is that consumer sentiment is more sensitive to inflation, and consumer confidence is sensitive to the labor market.

In the post-epidemic period, sentiment has been weighed down by the high price levels we’ve been in since the outbreak. And self-confidence is more exposed to what is happening in the labor market.

INVESTOPEDIA: What do the two primary studies tell us now?

OREN KLACHKIN: It is becoming clear that the weight of high prices and high interest rates is weighing on the minds of consumers. That is becoming increasingly apparent as the labor market begins to show signs of easing.

And as that labor market slows down, the income side of the equation won’t be able to provide as much of a reduction in high prices and high interest rates as it has been.

Consumers now think they’re going to spend less on expensive, big-ticket items. They will also take fewer vacations and spend less discretionary money. And I think that all has to do with the fact that income growth is slowing, but interest rates are still high. The cost of goods is still very high.

INVESTOPEDIA: Are there any indicators in the research that you follow directly? And if so, what can they tell us?

OREN KLACHKIN: The measures of the current situation have become worse, for lack of a better word, and are becoming less and less. Also, consumers think things are getting worse, especially now. But they still have a somewhat encouraging outlook for what lies ahead for the economy in the second half of this year and next year.

So I’m watching the gap between current conditions and expectations very closely. There is evidence to suggest that in fact, the gap between current conditions and expectations can provide a leading indicator of the economy as a whole. I’m looking at that very well.

Also, within the various reports, there is a series of articles about consumer plans regarding what they will spend on big ticket items such as cars, houses, and if they are going on vacation, on trips. , and things like that. I will say that confidence and sentiment scores in headlines are not a very good indicator of spending.

INVESTOPEDIA: Why is this research important? And what can they tell us about the economy?

OREN KLACHKIN: In fact, they give us an indication of consumer intent, a barometer for consumers. But we also need to think about the real data, the hard data, that we have in the economy. The jobs report is one, inflation, obviously very important, interest rates. All these important facts are very important.

And I say that because the intentions of consumers, or the thoughts of consumers about the economy, do not always translate into their choice to spend money. That became very clear after the epidemic. The sentiment, in general, was very negative. Consumers continued to go out and buy, spend, go on vacation, things like that. So we need to look at it as a whole.