Consumer sentiment has collapsed to historic lows—across incomes and political lines. Here’s why investors and the Fed must pay attention.
KEY TAKEAWAYS
Consumer sentiment has fallen to record lows across all groups
Political bias cannot explain the collapse because all parties dropped together
Lower-income households are struggling, but higher earners are weakening too
Sentiment drives spending and spending drives GDP
The Fed should take note because soft data is sending a clear macro warning
MY HOT TAKES
Sentiment is no longer a “soft” warning–it’s a hard macro signal
The breadth of this decline is the most important part
Higher earners weakening confirms a real wealth-effect reversal
Markets are ignoring something they shouldn’t
The Fed’s wait-and-see stance may be dangerously outdated
You can quote me: “When every political party loses confidence at the same time, something real is happening.”
Can you feel it? How do you feel… about the economy? Are prices of the things and services you pay for strangling you? How about your job prospects–or better yet–how about job prospects for your recent-college-grad-adult children, you know, the ones you still support but don’t tell anyone? Market gains have grown the value of your hard-earned savings, but will the next few years be as good as the past few? Are you still thinking of going YOLO on that trip to Greece? Most important, are you going to spend as much this year on “wanna haves” as last year, or is your focus shifting into “gotta haves?” These are REALLY important questions Mr. and Mrs. Consumer! Why? Because what you do… er buy with your money in the next year will have a nearly 70% impact on Gross Domestic Product (GDP). YOU are in the power position.
My long-time followers most likely know where this is going. It is my job to present you with all the information you need to make investment decisions. I tell you what to look for in stock earnings, economic releases, and maybe some other random things that may or may not be critical. Let’s get a few things clear, straight away. A solid economy is the foundation for all sustainable growth in your portfolio. Full stop. I don’t care what stock, metal, crypto, option contract, sector etf, etc. you own. If the economy cracks, your wealth will erode. Now, of course, not all investments decline equally, and that is another topic for another day, so calm down and stay focused. So, economic health is like the ocean, and your investments are like ships on the ocean. When the tide ebbs, even your shiniest, safest ship ebbs with it. So, have I established that we want a stable economy? I hope so.
Back to consumption. I repeat this often because I want to bake it into your investment brain: consumption is critical to economic growth because it makes up more than ⅔ of GDP. And my famous line (T-shirts coming soon 😉): “confident consumers, consume!” So, are you a confident consumer? Well, according to the University of Michigan, you are losing confidence. That’s right, Friday’s final U Mich Sentiment Index for November showed a decline from 53.6 to 51. Check out this chart of the index and keep reading.
This is my favorite Bloomberg ECAN chart showing you the high-level components of the U Mich Sentiment Index (white line), which clearly shows a marked decline year to date. In fact, if you look closely, you will note that it is the lowest since June of 2022. Let’s dig in further.
The creators of the index polled 1,129 households each month, designed to capture how Americans perceive their current financial situation and what they expect in the near future. Respondents answer five core questions: two about current economic conditions (how their personal finances compare with a year ago, and whether now is a good time to buy major household items) and three about future expectations (their personal financial outlook for the year ahead, expectations for business conditions over the next year, and expectations for business conditions over the next five years). Each response is converted into a diffusion index–essentially the share of positive answers minus the share of negative answers–then weighted and combined into two sub-indices (Current Conditions and Expectations), which are finally blended to form the headline Consumer Sentiment Index. Got it? Great. Now pay close attention. Have a look at this chart, then keep reading.
This is a chart of the sentiment of current conditions (white line). It should not take you too long to notice the low points since 1978, which is as far back as the University of Michigan tracked it. You can see how it hit a low in 2008 at the height of the pain from the Global Financial Crisis. You will also note that it dropped harshly in March of 2020 as the pandemic gripped the global economy. You surely can't miss how it really swooned in 2022 with the Fed throttling the economy with draconian rate hikes. Finally, you can see where we are today. 51.1–the lowest level in the index’s history. So, does this spell disaster?
I want to be clear, many economists wave off surveys as being “soft” data, not tied to any real economic performance measure. One of the nay sayers’ principal arguments is that respondents lie–that their actual sentiment may not be reflected in their buying habits. This argument is sharpest when it comes to political affiliation. Democrats are clearly more confident when their “guy” is in the White House and vice versa. So how do we know if this record low reading is not just the result of angry Democrats bringing the index down because they are unhappy with President Trump's policies? Ah, U Mich has an answer to that–they track respondent sentiment by political party. Have a look at this chart and keep reading.
This plot shows sentiment conditions split up into parties. You should note that political bias in the cross overs between Republicans (gold line) and Democrats (light blue line) as guards changed in the White House. This proves that the bias exists. However, despite the bias, what is notable here is that all political affiliations, Republican, Democrats, and Independents are all losing confidence. This, my friends, is a potential warning sign and should be noted.
Now, I want to give you one more bonus bit of information from this month’s survey. I have been writing a lot about the “K-shaped” economic recovery, and so have many of my colleagues. 😉 It is a real problem, and it was highlighted in this past earnings season by the banks and Walmart this past week, where it was made clear that lower-income Americans are struggling more than upper. Check out this final chart and follow me to the finish.
This chart shows consumer sentiment for respondents who earn more than $75k (light blue line) and less (green line). I realize that $75k is a random number, but that is what U Mich uses. You should note that lower income earners are less optimistic about the future. In fact, the 45.3 reading is also the lowest in its history. Though I don’t show it on this chart, did you know that both income classes scored roughly the same from late 2021 through 2023? As you might guess, lower earners are always below higher earners, but during that time sentiment shifted slightly. What that most likely reflects, however, is higher earners–who are more likely to own stocks–suffered immensely during that period. Support for the wealth effect hypothesis.
Let’s bring this all home, because these charts are not just pretty pictures or Bloomberg eye candy. When you step back and look at the big picture of the data, it becomes quite difficult–borderline impossible–to ignore what’s happening beneath the surface. Sentiment isn’t wobbling at the edges or drifting lazily lower. It has collapsed. It has broken through historical floors. We are witnessing multi-decade, and in some cases all-time, lows across groups, across incomes, across political affiliations. Even the loudest critics of soft data, the folks who love to wave off surveys as “feelings, not facts,” cannot simply hand-wave this away. When every group moves in the same direction, and that direction is straight down, it tells you something meaningful about the lived experience of American households. It tells you that the strain, whether from inflation, job worries, political exhaustion, or tariff uncertainty, is no longer theoretical. It’s being felt, deeply and broadly.
And this matters for one critical reason: feelings drive behavior. I’ve said it many times, and I will keep saying it until it’s printed on coffee mugs next to the T-shirts–confident consumers consume. Consumers who feel squeezed, uncertain, or fatigued pull back. Remember, this entire index is built around how you feel about your finances today, whether now is a good time to spend, and whether you believe the next year or five years will bring better or worse conditions. Those are the exact same mental questions you ask yourself before you commit to a vacation, a car, a home renovation, or even a ginormous bottle of olive oil from Costco. And when tens of millions of consumers all begin to tilt negative at once, the cumulative effect on the economy does not stay soft for long. It turns into slower spending, weaker retail numbers, rising credit stress, and eventually weaker GDP prints.
So yes, you can debate whether survey respondents exaggerate. You can argue about political bias. You can push back on the timing of soft versus hard data. But even the harshest critics must concede that something real is happening here. If this were merely a partisan blip, the lines would diverge, not collapse together. If this were merely a temporary inflation scare, higher earners, who have more cushion, wouldn’t be plunging with lower earners. If this were merely a reaction to one or two scary headlines, we wouldn’t be printing levels never seen in the entire history of the series.
And I would be remiss if I didn’t make the following point–one that may not be comfortable for policymakers. The Federal Reserve needs to pay attention. The whole purpose of monetary policy is to promote stable prices and maximum employment. When consumer sentiment across all cohorts is flashing deep red, that is not nothing. It means households feel squeezed. It means the labor market doesn’t feel as strong from the inside as the headline numbers suggest. It means the public, the people who actually spend the money that constitutes two-thirds of GDP, are signaling distress. Soft data does not have to be perfect to be useful. It simply has to be directionally telling, and this direction is unmistakable.
Now, I am not here to spread doom–that would be off-brand for me. I don’t do apocalypse narratives or end-of-days forecasting. Things can change, and they can change quickly. Sentiment can recover just as fast as it falls when uncertainty is lifted, when policy stabilizes, when markets calm down, or when inflation genuinely eases. There is real room here for improvement. But that doesn’t mean you take your eye off the ball. Not now. Not with readings this low. Investors need to stay sharper than usual, more observant than usual, and more honest than usual about what households are telling us.
Focus. Stay nimble. Keep collecting facts. Sentiment has rolled over in a decisive, historic way, and even the naysayers can’t discount it this time. The Fed shouldn’t either.
FRIDAY’S MARKETS
Thanks to some dovish gestures from known New York FOMC voter John Williams, stocks managed a strong close in the green on Friday, capping off a painful week of losses. 10-year yields declined by another 2 basis points on Friday to reflect renewed confidence in a December cut. The flash in positive investor sentiment was not enough to keep Bitcoin and cryptos from falling further.
NEXT UP
Housing Starts (September) are expected to have gained 1.7% for the month.
Building Permits (September) may have increased by 1.3%.
The week ahead, which will be abbreviated due to Thanksgiving on Thursday will feature some still-important earnings releases (don’t lose focus) as well as more housing numbers, regional Fed reports, Beige Book, Retail Sales, Producer Price Index / PPI, Conference Board Consumer Confidence, Initial Jobless Claims are BACK 😀, and Leading Economic Index. Download the attached earnings and economic charts so that you can be confident that you are the most up-to-date amongst your friends.
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