A Cruel Twist for the Long Awaited Improvement in Consumer Sentiment
The Kamala Harris campaign was probably feeling a bit of emotional whiplash on Friday morning as the University of Michigan’s consumer sentiment barometer released the final results prior to the election.
The Harris campaign—like the Biden campaign before them and many left-tilted pundits—have long believed that the dismal consumer sentiment numbers that have persisted through the Biden-Harris administration were failing to reflect economic fundamentals. What’s more, they have been eagerly anticipating a narrowing or even closure of the purported gap between what they see as objective evidence of a strong economy and poor consumer opinions of the economy.
This expectation, however, has been largely thwarted throughout the election year. The index of consumer sentiment began the year at 79, which was the highest reading for the index since June of 2021. After rising due to the reopening of the U.S. economy in early 2021, consumer sentiment tumbled that summer after inflation began to take off.
Similarly, consumer sentiment climbed at the end of last year and start of this year as inflation declined, but this progress was thwarted by the surprise resurgence of inflation in the first quarter, which reminded consumers that the authorities were still underestimating the persistence of inflation and had not yet re-established price stability. But even when it was rising, it never climbed anywhere close to where it had been under Donald Trump, with the index hitting 101 just before the pandemic struck.
What’s more, there’s a lot of evidence that how consumers feel about the economy has an impact on how they vote in presidential elections. Exactly which metrics drive votes is hotly debated and, as with all metrics that purport to predict outcomes of presidential elections, some skepticism is required because the sample size is too small. We only have presidential elections every four years, so you need to be careful when drawing deterministic inferences. Still, the weight of the research indicates that an incumbent party’s chances are a lot better if people feel better about the economy and worse when they think the economy is not doing well.
So, when the University of Michigan’s survey of consumer sentiment showed a stronger-than-expected rise in consumer sentiment, it’s easy to imagine that cheers went up around the Harris headquarters. Although the headline index figure is still quite low, it had risen to its best level since May. And certainly that looks like a welcome change less than two weeks before the election.
Is Consumer Sentiment Driven by Partisanship?
The details, however, were no doubt unwelcome. As it turns out, the main driver of the improvement in consumer sentiment was a big improvement in how Republicans feel about the economy. And that increase was the result of an increase in their confidence that Trump would win the election. There was a small improvement among independents, no doubt also driven by confidence in a Trump victory. Sentiment among Democrats actually declined.
Why has consumer sentiment been so low for so long? Democrats and their allies in the media have insisted that this is a deep mystery because they are convinced that the “fundamentals” of the economy are strong. Sometimes they even claim that it is simply partisanship—Republicans feeling glum about the economy because a Democrat is in the White House—that explains almost all the bad “vibes.”
There’s some truth to the idea that partisanship influences sentiment. “Partisan differences in consumer attitudes and expectations are well documented and date back to at least the Reagan administration. Consumers affiliated with the political party in the White House tend to have higher levels of sentiment and more favorable expectations than those whose party is not,” the University of Michigan survey director Joanne Hsu wrote in a note about the topic back in February. And this month’s movement in sentiment confirms that. The partisanship gaps are actually greater than age and income gaps even when it comes to the prospects for future employment.
What’s more, this appears to have become more pronounced in recent years. After Trump’s victory in 2016, Republican sentiment was buoyant and consistent with past economic booms and Democrat sentiment implied that they were expecting a recession. Based on the performance of the economy, the GOP’s view appears to have been justified and Democrat expectations off-base.
Shortly after the election of Biden in 2020, Republican sentiment turned sour and Democrat sentiment improved. But unlike during the Trump years, Democrat sentiment did not quite hold up. After the index hit 102 in March and 107 in April of 2021, sentiment was dragged down by inflation and—with a few exceptional bursts of optimism here and there—mostly stayed at low to middling levels.
Importantly, partisanship does not mean that the index is not reflecting “true” consumer sentiment or is not useful as an economic gauge or even a political barometer in an election year. For one thing, even if consumers are motivated by partisanship to see the economy in a certain light, their view still impacts their behavior. Consumers who are Republicans tend to expect the economy to perform better and see economic conditions more favorably when a Republican is in the White House—and this effects their investing and consumption. The same is true for Democrats.
To get around partisan bias in the numbers, it’s useful to look at consumer sentiment among independents. Among independents, the index is now at 65.8 and sunk as low as 48.5 in June 2022, the worst month of year-over-year inflation. If it was just partisanship driving the numbers down, you wouldn’t expect sentiment among independents to stay so low. It’s not just Republicans who are bummed about the Biden-Harris economy. Independents are also unhappy, and even Democrats are just meh.
The Real Economic Fundamental: The Price Level
A better explanation is that the perceived gap between fundamentals and sentiment is itself illusory. What consumers are responding to is the price level, which is still far above what it would be had inflation not risen to the worst level in 40 years and then remained persistently high for years. This is the economic fundamental that has mattered throughout the Biden administration and is likely to matter in this presidential election.
Why hasn’t it improved by much even though inflation has come down? Because inflation is very different from many of the other types of economic fundamentals. When unemployment is high and then declines, there is usually some residual economic damage and certainly financial pain for households with workers who spent time out of work, but the unemployment level doesn’t stay high when the unemployment rate falls. When inflation has been high and is now lower, the price level stays high. The pain persists even when the cause of the affliction has passed.
There’s no gap between sentiment and fundamentals. It’s just that inflation is more fundamental and its impact longer-lasting than many expected.
