Consumer Sentiment Is Lousy but Retail Sales Have Rarely Been Stronger — We’ll Explain
Most economists were caught off-guard by the August reading of the University of Michigan’s (UoM) Index of Consumer Sentiment (ICS), which showed one of the largest monthly declines on record and was mostly attributed to the fast-spreading delta variant of the COVID-19 virus and its economic implications.1 The two components of the ICS (Current Economic Conditions and Consumer Expectations) both took sizeable hits. Surprisingly, the August ICS reading of 70.3 was lower than any month during the COVID-19 period. Less surprising, financial markets completely ignored it.
Granted, the August decline in the ICS was likely an emotionally charged response to the virulent fourth wave of the COVID-19 virus, but consumer sentiment was in the doldrums before that, with respondents also expressing concerns about higher inflation and slowing jobs growth and income gains. The July 2021 reading of 81 was far off the pre-COVID level of 101 in February 2020 and matched pre-pandemic lows not seen since 2014 (Exhibit 1).
The national economy has nearly fully reopened and recently surpassed pre-COVID activity levels (as measured by GDP), the official unemployment rate has recovered to the mid-5% range and the stock market has doubled off its COVID lows of March 2020, but many consumers just aren’t feeling it, judging by the ICS. A breakdown of the ICS by income groups reflects a widening divide in sentiment between higher-income and lower-income groups since the recovery began, which is historically typical.
The intense public debates recently around ending various pandemic-related federal aid programs or moratoria speaks to the large numbers of Americans still struggling to gain their economic footing more than a year after the recovery got underway, while a fair share of other Americans are doing better than ever.