A tale of two surveys: US consumers have mixed feelings on economy

The U.S. economy grew by over 4 percent in the second quarter, and unemployment is at a multi-decade low, but how does the U.S. consumer feel? It depends on who’s asking, it would seem.

If asked about job prospects, things are stellar. If asked about tariffs and global trade, not so much. The key question for companies and investors, of course, is which of these views will exert a greater influence on consumer behavior in the coming months.

Given the most recent detail in the two leading consumer surveys — The Conference Board’s Consumer Confidence Survey and the University of Michigan’s (U-M) Consumer Sentiment Index — we could expect consumer spending to moderate slightly, but from very strong levels. 

First, a bit of background. The two surveys tend to track each other over time, but they could diverge over the short run. The Conference Board survey places a greater emphasis on labor market conditions. The U-M survey results emphasize consumer perceptions of their own finances and overall business conditions.

The two surveys also use different time frames: the Conference Board’s index solicits expectations for the next six months, while the U-M survey looks at a time frame of up to five years.

Finally, the Conference Board tends to survey new folks every month, while the final release of the U-M survey is based on 60 percent new respondents and 40 percent previously polled.

What do these differences mean for each survey’s ability to infer consumer behaviour? It turns out, the U-M survey specifically does a reasonably good job at picking up early recessionary signals. By contrast, the Conference Board survey’s emphasis on employment does not render it a good signal of impending recessions.

The labor market tends to be a lagging indicator, as notable changes in employment usually take place after financial conditions and real activity have turned. Does this mean that we should be concerned about the latest deterioration in consumer sentiment from the U-M index?

Not so fast. Even though the U-M survey is decent at highlighting warning signs, it can be criticized for not giving sufficient weight to positive signals, especially at turning points. American consumers appear to be more attuned to negative news than positive news.

While the reasons for higher consumer sensitivity to negative news are unknown, this propensity could reflect a fundamental tenet of behavioural economics: risk aversion. Humans tend to place subjectively higher probabilities on negative outcomes than positive outcomes and assign greater weight to negative news than positive news. 

Let’s take this back to the most recent consumer confidence reports. The Conference Board’s index registered a 133.4 score, the highest in this business cycle. This should not be surprising, as the labor market remains very strong and shows no sign of turning sour. Recall, the unemployment rate touched the lowest level since the 1960s in May. 

By contrast, the U-M survey was less upbeat overall. Specifically, it reflected the recent relentless news flow regarding trade tensions and tariffs on big ticket items. Unsurprisingly, consumers were most pessimistic when asked for their views on buying a vehicle or major household item like a washing machine.

By contrast, views on the labor market were upbeat, and generally in sync with the positive view expressed in the Conference Board’s index. 

Month-to-month, the Conference Board and U-M surveys do not track each other well, nor excel in predicting consumer spending. Like any other model or economic indicator, the surveys expose a wedge between expectations and outcomes. No method can consistently and accurately capture human behaviour.

Perhaps the best approach is therefore to look at what folks actually do. From March to June, personal consumer expenditure grew at the fastest pace since 2012. Retail sales data has also been strong. Consumers may be sensitive to tariff-related news, but their pessimism has not affected their spending habits — at least, not yet.

Sonia Meskin is a U.S. economist for Standard Chartered Bank.