Consumer Sentiment Drops 20% Since December 2024 Driving Economic Slowdown

In recent years, there has been a noticeable disconnect between so-called soft economic data, such as consumer confidence, and hard data, like payrolls and GDP. This disconnect has been described as a "vibecession," a term coined by economist Kyla Scanlon in 2022. During this period, despite high inflation and increased borrowing costs due to aggressive rate hikes by the Federal Reserve, consumers continued to spend, and the economy avoided a recession. However, this dynamic may be changing.

Consumer sentiment has been volatile, with significant drops following events like President Donald Trump's trade war and subsequent tariff increases. While sentiment has partially recovered, it remains 20% below December 2024 levels. The University of Michigan survey highlighted that consumers are still guarded and concerned about the economy's trajectory. This sentiment is reflected in various economic indicators, such as increased student-loan delinquencies, job market uncertainty, and rising oil prices due to geopolitical tensions.

The cumulative effect of these factors is taking a toll on the economy. Senior economist at NerdWallet, Elizabeth Renter, noted that while there has been a slight improvement in sentiment scores, the overall picture remains concerning. The soft data on the economy, which includes consumer sentiment, is becoming harder to dismiss in favor of hard data like unemployment and inflation. Fed Chairman Jerome Powell has indicated that the Federal Reserve will not act on rates until the hard data provides a clear reason to do so. However, the soft data may be influencing the hard data more significantly now.

Renter explained that the current economic environment is different from a few years ago. Consumers no longer have the luxury of easily finding better jobs or relying on excess savings and debt payment forbearances. Household debt is rebounding to pre-pandemic levels, eroding the ability to absorb unexpected expenses or job losses. This shift means that consumer sentiment, or "vibes," now has a greater impact on behavior and, consequently, the health of the economy.

Chief economist at Comerica Bank, Bill Adams, also drew a direct line between consumer sentiment and actual spending. Analyzing the May retail sales report, Adams noted that consumers pulled back on spending across various categories, including durable goods, daily expenses like groceries and restaurants, and residential investments in home improvements. This pullback suggests that weak consumer confidence is a significant factor in the recent decline in consumer spending.