Consumer Sentiment Nears Record Lows: What Is It and Why Does It Matter?

What is consumer sentiment?

Consumer sentiment, also known as consumer confidence, is an index of how U.S. consumers are feeling about the current and future state of the economy, and all that folds into the economy: the job market, wages, business conditions and their personal finances. It’s a valuable tool for economists, as consumer sentiment can be used as an early predictor of economic changes.

How people feel about the economy can directly impact the economy, because consumers' attitudes often affect how much they spend on things like food, transportation, household goods, entertainment and more. In 2023, consumers’ personal spending made up 67.9% of the U.S. GDP, or gross domestic product, according to the Federal Reserve Bank of St. Louis. That’s a significant majority of the nation’s GDP, so keeping a close eye on consumer sentiment is key in foreseeing potential economic slumps or rallies.

When the economy is in a recession, consumer sentiment falls. On the flip side, when the economy is expanding, consumer sentiment rises. The index does typically peak before a recession, though. Unlike other indexes, such as the Consumer Price Index (CPI), consumer sentiment isn’t calculated using spending data or hard figures. Instead, economists rely on two major surveys of consumer confidence: The University of Michigan’s Surveys of Consumers and the Conference Board’s Consumer Confidence Survey. Each survey collects the general attitudes and opinions of hundreds of U.S. consumers. Then, those opinions are assigned numeric values and aggregated into one number, or index.

The University of Michigan’s Index of Consumer Sentiment

The Index of Consumer Sentiment is one of three indexes derived from the University of Michigan’s Surveys of Consumers, which started in 1946. Originally conducted annually, the surveys switched to a monthly cadence in 1978. The surveys have a sample size of roughly 600 people selected randomly from the 48 adjoining U.S. states and the District of Columbia.

The surveys include roughly 50 questions covering personal finances, business conditions and buying conditions. From those surveyed, three indexes are produced: the Index of Consumer Sentiment, the Index of Consumer Expectations and the Index of Current Economic Conditions.

The Index of Consumer Sentiment is the most commonly cited index of the bunch. It’s derived from these five questions:

1. "We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?"

2. "Now, looking ahead: Do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?"

3. "Now, turning to business conditions in the country as a whole. Do you think that during the next twelve months we'll have good times financially, or bad times, or what?"

4. "Looking ahead, which would you say is more likely: that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?"

5. "About the big things people buy for their homes, such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?"

Historically, the surveys have been conducted by phone. Starting in July 2024, they'll be conducted online, with researchers aiming for 900 to 1,000 respondents.

The Conference Board’s Consumer Confidence Index

Meanwhile, the Conference Board’s Consumer Confidence Survey was launched in 1967 as a mail survey conducted every other month. Today, the survey is conducted online, on a monthly basis, with a sample size of roughly 3,000 respondents.

The Conference Board issues a five-question survey to calculate three distinct indexes: the Consumer Confidence Index, the Present Situation Index and the Expectations Index. Once the surveys have been completed, each question is given a relative value. Then, those values are compared against their relative values from 1985 — the survey’s benchmark year, with an index set at 100.

The Consumer Confidence Index is the average index for all five questions. The Present Situation Index is calculated using the average indexes for the first two questions, and the remaining three questions determine the Expectations Index.

Present Situation Index

1. Respondents’ appraisal of current business conditions.

2. Respondents’ appraisal of current employment conditions.

Expectations Index

1. Respondents’ expectations regarding business conditions six months hence.

2. Respondents’ expectations regarding employment conditions six months hence.

3. Respondents’ expectations regarding their total family income six months hence. 

Consumer Confidence Index

This is the average index for all five questions above.

The Federal Reserve Bank of New York’s Survey of Consumer Expectations

The Federal Reserve Bank of New York’s Survey of Consumer Expectations focuses on expectations about economic outcomes.

The survey, which is conducted by NielsenIQ, launched in 2013. It’s an internet-based survey that asks a rotating panel of 1,300 heads-of-household about their expectations of the economy, as well as their own personal finances related to the following categories:

Inflation:

• Inflation expectations. 

• Inflation uncertainty. 

• Probability of different inflation outcomes. 

• Home price change expectations. 

• Home price change uncertainty. 

• Commodity price change expectations. 

Labor market:

• Earnings growth expectations. 

• Earnings growth uncertainty. 

• Job separation expectations. 

• Job finding expectations. 

• Moving expectations. 

• Expectations of higher unemployment. 

Household finance:

• Household income growth expectations. 

• Household spending growth expectations. 

• Change in taxes. 

• Change in credit availability. 

• Debt delinquency expectations. 

• Expectations of higher interest rate on savings accounts. 

• Household financial situation.

• Expectations of higher stock prices. 

• Government debt growth expectations.

What is consumer sentiment like right now?

The final reading for April from the University of Michigan released on April 25 shows:

• The Index of Consumer Sentiment went down to 52.2, compared to its March reading of 57.

• Current Economic Conditions registered at 59.8, compared to 63.8 in March.

• The Index of Consumer Expectations was at 47.3, compared to  52.6 in March.

Data for April from the Conference Board released on April 29 shows:

• The Consumer Confidence Index registered at 86 in April down from 93.9 in March.

• The Present Situation Index decreased to 133.5 from 134.4  in March.

• The Expectations Index fell to 54.4 in April from 66.9 in March.

» MORE: Current rate of inflation and why it matters

The highlights for March from the Federal Reserve Bank of New York’s Survey of Consumer Expectations released on April 14 shows:

• Inflation. Median inflation expectations over the next 12 months increased by 0.5 percentage point to 3.6%, from the previous month. Inflation expectations for the three-year horizon remained unchanged at 3% and increased by 0.1 percentage point to 2.9% for the five-year horizon.

• Commodity prices. Year ahead price expectations increased in multiple categories including the price of food (up 0.1 percentage point to 5.2%); medical care (up 0.7 percentage point to 7.9%); and rent (up 0.5 percentage point to 7.2%). Price expectations went down for gas (down 0.5 percentage point to 3.2%) and the cost of a college education (down 0.2 percentage point to 6.7%). 

• Earnings expectations. Median one-year-ahead expectations for earnings growth went down by 0.2 percentage point to 2.8%. 

• Unemployment expectations. The mean probability that the unemployment rate will increase a year from now increased by 4.6 percentage points to 44% — the highest reading since April 2020. 

• Probability of job loss. The mean expectation of job loss over the next 12 months increased by 1.6 percentage points to 15.7% — the highest level in a year. 

• Probability of quitting. The mean expectation of quitting a job over the next 12 months went up by 0.4 percentage point to 18%. 

• Probability of finding a job. The mean expectation of finding a job over the next 12 months decreased to 51.1% (down 0.1 percentage point). 

• Household spending growth. Median expectations of household spending growth over the next year went down to 4.9% (a 0.1 percentage point decline).

• Credit access. Households reported it is harder to get credit than in the previous month and a larger share of survey respondents also said they expect it will be hard to get credit in the next year.

When do the next consumer sentiment reports come out?