Consumer Sentiment Slumps, Consumer Spending Rises
If you trust the surveys, we’re seeing the best of times and the worst of times. More Americans think we’re on the “right track” than at any time in over 20 years. Yet consumer sentiment is at the worst level in four years.
According to a recent Economist/YouGov poll, 41 percent of Americans now say the country is on the right track, the highest level since 2004. This remarkable improvement stands in stark contrast to the reported plunge in consumer sentiment, which according to the University of Michigan’s Consumer Sentiment Index for March 2025, sits at its lowest level since 2021.
There’s also an extremely wide gap between consumer sentiment about current conditions and expectations, and there has been for years now. Consumers have basically been predicting a severe downturn ever since they got slammed by Bidenflation in 2021-2022, and that slump has never materialized. As Aditya Bhave of Bank of America recently noted, “There is no historical precedent for this sort of ‘irrationality’ in expectations. In February too, the decline in expectations was twice as large as the drop in the present situation index.”
Among Democrats, this is even more extreme. Democratic assessments of the present situation indicate the current economy as pretty bad, but expectations indicate that Democrats see something worse than Covid and worse than the financial crisis coming down the economic pipeline. This “sky is falling” view likely reflects their frustration and despair over Trump’s return to power rather than actual economic conditions.
Tariffs as the Explanation for Everything Bad
The financial press, Wall Street analysts, and corporate America have latched on to tariffs as the explanation for everything negative, especially consumer sentiment, or as a way to describe anything positive as actually bad. Mentions of tariffs have exploded in earnings calls as corporate executives have discovered that mentioning import duties works like a magical incantation to dispel the skepticism of financial reporters. If people are growing a bit tired of wearing yoga pants to business meetings, Lululemon will blame tariffs for downcast guidance.
Disney has not yet blamed the box office flop of Snow White on tariffs, but just give it time.
Apparently, all news is bad news if tariffs are coming. If inflation goes up, it is because of tariffs that have yet to be imposed. If businesses invest more in capital equipment and inventories, it’s just “front-running” ahead of tariffs. Recently, analysts were predicting consumers would “pull back” from spending in anticipation of tariffs. When that didn’t materialize, tariff front-running by consumers was the explanation for rising spending.
Adding to the complexity, President Trump is more popular than he was in his first term when consumer sentiment was much higher. This is not just his core supporters rallying around the MAGA flag. According to recent Gallup polling, Trump’s approval ratings have significantly improved among key demographics: Hispanic adults (up 15 points), Black adults (up nine points), and young adults (up six points). Much of this improvement reflects higher Republican identification among these groups, which is itself a sign of a broader optimism about the ability of the U.S. economy to deliver widespread prosperity.
Yet the Economic Data Is Still Good
And the hard data on the economy is quite good. On Friday, we got consumer spending and household income data showing that personal consumption expenditures (PCE) increased by 0.4 percent in February, reflecting ongoing consumer activity. Personal income rose by 0.8 percent during the same period, indicating that Americans are earning more and, by extension, have the capacity to spend more. This kind of income growth would normally be associated with high consumer confidence.
But it’s not. Instead, what we’re seeing is a bizarre and persistent gap between what Americans are doing — spending more, earning more, feeling good about the country’s direction — and what consumer sentiment surveys claim they are feeling.
Recent history, however, suggests that it would be wrong to focus heavily on consumer sentiment when hard data is telling a different story. The hard data has been a surer guide to the post-pandemic economy and likely will continue to be for the foreseeable future. Households will continue to spend so long as employment remains strong and incomes are growing—even if they tell surveys they are worried about the future.
Buy the data. Sell the narratives.