Economic Sentiment Probably Isn’t Disconnected from Reality (December 3, 2023)

Don’t like private sentiment surveys? Census pulse data are worth heeding.

There is a popular assumption that Americans’ economic sentiment is at odds with economic reality. But that logic may be backward–meaning consumer surveys might now warrant more investor attention, not less. 

Many economists say they are perplexed by sour sentiment reports alongside ongoing strength across several major economic indicators. The head scratching continued in the latest week: Third-quarter gross domestic product was revised upward, to a 5.2% annualized pace, from an already strong initial print. Retailers reported a record-setting start to the holiday shopping season, mortgage applications rose, and two measures of home prices increased. 

And yet the Conference Board’s consumer expectations index for the third straight month remained below the threshold that signals recession within the next 12 months. The report followed the University of Michigan's index of consumer sentiment, which fell for a fourth consecutive month and dropped 4% from the prior month alone.

There are several reasons why many economists and investors downplay consumer confidence surveys. Here are a few. What people say and do don’t always line up. Politics has historically affected consumer sentiment, and survey data show a clear gap in sentiment based on political affiliation that flips with the presidential party. The latter reason gives way to a newer justification for dismissing consumer sentiment: Americans simply don’t understand that they are better off now than before the pandemic, some economists and commentators say. 

As economist Claudia Sahm recently put it, “the wheels have come off the bus of the Michigan survey. This is not economics.” She argues that for most families, jobs, paychecks, spending, wealth, and financial security have made big gains that offset the burden of higher inflation. 

It seems a mistake, though, to assume that worried consumers are altogether wrong. It also seems worth considering the idea that perception often is reality, not least so in economics. 

What is more, the presumed disconnect between economic mood and reality comes at a time when hard economic data is increasingly dubious. Economists at Goldman Sachs issued a recent report on the topic.

“The market’s sensitivity to individual data releases has increased sharply over the last couple of years, as those releases will ultimately decide Fed policy,” Goldman says, focusing on  seasonal distortions and falling response rates in warning that data-quality issues have made “assessing the implications of data releases for the outlook in real time more difficult.”

Take the Job Openings and Labor Turnover Survey. Aside from being a particularly delayed release (October data will hit on Tuesday), the JOLTS business survey’s response rate has halved since the pandemic to just 30%. 

Responses are imputed, meaning existing JOLTS data are used to fill in missing responses. The upshot: healthy businesses are counted more than once, effectively inflating job-opening stats.

Consider as well the record gap in the number of jobs reflected in the establishment and household surveys comprising the monthly employment situation report. Double counting–one person can be counted multiple times in the establishment survey–explains about half of the 2.6 million difference. As Warren Pies of 3Fourteen Research notes, multiple job holders have surged by about 700,000 just since the April low in the unemployment rate.

Now think about the record spread between the year-over-year changes in GDP and GDI, or gross domestic income. MacroMavens founder Steph Pompboy notes that GDI has only been negative at the same time GDP was positive twice before–in 2001 and 2007, leading into recessions.

This brings us to the Census Bureau’s Household Pulse Survey. 

Launched during the pandemic in an effort to gather higher-frequency data about households’ economic well being, the survey covers everything from employment to housing security and food sufficiency. The sample sizes are large compared with those of the University of Michigan and the Conference Board. A wide swath of ages, incomes, and other characteristics are represented, and the survey is conducted every two weeks as opposed to monthly. 

Investors worried about the integrity of sentiment indexes or looking for more on-the-ground data to supplement official reports can find a treasure trove of data in the household pulse data. 

The latest batch of Census stats doesn’t just reinforce the picture sentiment reports are painting. In some respects, the Census reports suggest household economics are worse than many seem to assume and data reflect, with particular deterioration over the past one-to-two months.

Some 63% of respondents reported difficulty paying for usual household expenses in the last seven days. Nearly one in five said doing so was “very difficult,” and more than a quarter of overall respondents said they tapped savings or sold assets or possessions–including withdrawals from retirement accounts–to meet spending needs. A tenth reported borrowing from family or friends.

Asked about the likelihood of having to leave their house in the next two months due to foreclosure, 21% answered “very” or “somewhat” likely. About 35% of respondents said they are a month behind on mortgage payments, and 24% are two months behind. (7% are behind by eight months or more). 

Census appends a disclaimer that the pulse data are “experimental” and that standard errors may be large, referring to how different the population mean may be from the sample mean. Even so, the data cast doubt over officially reported mortgage delinquencies. For the third quarter, which is the most recently available data, the Fed reported only 1.72% of single-family mortgages were delinquent.

Renters expressed even bigger concerns. Some 37% said they are “very” or “somewhat” likely to face eviction in the next two months. About a third of the respondents say they are a month behind on rent, and roughly a quarter say they are two months late. 

Sentiment surveys have plenty of drawbacks. But given hard data-quality issues and inconsistencies, it doesn’t seem like the right time to disregard what households say about their economic well being and outlook. Census pulse data are one way to try to bridge sentiment with reality, and the message is worth heeding.