Discrepancy Between Economic Growth and Consumer Sentiment

Despite optimistic forecasts from economists regarding the U.S. economy, consumer sentiment has plummeted to its lowest levels since 2014, as reported by The Conference Board. The Federal Reserve Bank of Atlanta's GDP Now tracker indicates that the economy is projected to grow at an annualized rate of 5.4% in the fourth quarter, marking the fastest growth since the recovery from the pandemic recession. However, this economic growth contrasts sharply with the public's perception, leading to a significant disconnect between macroeconomic indicators and individual financial experiences.

4 Charts That Explain Why The Economy Is Growing But Doesn't Feel Like ItAmerican consumers are miserable. But they keep spending

The primary driver of this consumer pessimism appears to be the impact of inflation, which has disproportionately affected lower- and middle-income households. While high-income earners continue to drive consumer spending, those with lower incomes are struggling to maintain their purchasing power. Economists like Bernard Yaros from Oxford Economics have noted that the wealth gap has widened, with wealthier households benefiting from stock market gains and inflationary pressures hitting the less affluent hardest. This phenomenon has led to what economists describe as a "K-shaped" economy, where the financial trajectories of high earners diverge significantly from those of average earners.

4 Charts That Explain Why The Economy Is Growing But Doesn't Feel Like It

Interestingly, despite their negative outlook, consumers have continued to spend. Data from the U.S. Census Bureau indicates that retail and restaurant spending rose by 1% year-on-year in September, even as consumer sentiment remained low. Wealthier consumers, particularly those earning over $100,000, increased their spending by 4.3%, while those earning less than $60,000 also spent more, albeit at a slower rate of 3.8%. Retailers catering to budget-conscious shoppers, such as T.J. Maxx, have reported increased sales, suggesting that consumers are adjusting their shopping habits in response to economic pressures.

American consumers are miserable. But they keep spending

Amidst economic uncertainty, some consumers are turning to small indulgences, a behavior often referred to as the "lipstick effect." This trend, observed during economic downturns, sees consumers purchasing affordable luxury items to boost their spirits. For instance, sales of mass-market fragrances surged by 17% year-on-year from January to September, indicating a willingness to spend on small comforts despite broader financial concerns.

American consumers are miserable. But they keep spending

Yaros highlighted the "long shadow" of post-pandemic price increases as a significant factor in the disconnect between economic data and consumer sentiment. He also pointed to the increasingly negative reporting on economic news and the demographic composition of survey respondents as influencing perceptions of the economy.

4 Charts That Explain Why The Economy Is Growing But Doesn't Feel Like It

Critics argue that the prevailing economic narrative fails to account for the struggles of lower-income households, who are experiencing a decline in their financial situations. This perspective emphasizes the need for a more nuanced understanding of economic indicators that reflect the realities faced by different income groups.

4 Charts That Explain Why The Economy Is Growing But Doesn't Feel Like It

As the holiday shopping season approaches, analysts remain cautiously optimistic, predicting that overall retail spending could increase by 3.5-4% compared to last year. However, the ongoing divergence between economic growth and consumer sentiment raises questions about the sustainability of this spending behavior in the long term.

American consumers are miserable. But they keep spending