Juan Ochoa:

Welcome to the Michigan Minds Podcast, where we explore the wealth of knowledge from faculty experts at the University of Michigan. I am Juan Ochoa, International Public Relations Representative for the Michigan News Office. I want to welcome Joanne Hsu, Director of the Service of Consumers and Research Associate Professor at the Institute for Social Research, who specializes in household finance, consumer sentiment, and the impact of economic expectations on the national economy. Hi Joanne. I’m going to go straight to the point. As a consumer, I feel wary about the economy. How closely does consumer confidence actually correlate with economic indicators like spending, employment, and growth?

Joanne Hsu:

So here at the University of Michigan, we’ve been measuring consumer sentiment, consumer attitudes towards the economy since 1946. So we have a very long history of data, and we know how it correlates with the economy.

What decades of research has shown is that consumer sentiment and consumer expectations tend to be a leading indicator for the economy. When sentiment is on the downturn, when people feel really poorly about the economy, they tend to try to protect themselves by spending a little bit less. And when consumers do that across the board, that can lead to a slowdown in the economy because consumer spending is about 70% of GDP in this country.

Juan Ochoa:

Yes, that’s certainly what I’m doing right now, and I’m pretty sure a lot of us are. Everyone is trying to conserve some of their money. But can you point to periods when consumer confidence diverged sharply from economic reality and what’s happening?

Joanne Hsu:

So, as I mentioned, historically speaking, when people feel confident about the economy, they tend to spend more. When they feel less confident about the economy, they tend to spend less. What’s really interesting is that the relationship between these two has changed a little bit over the last few years.

So since the pandemic, starting around 2021, when post-pandemic inflation really started to surge, we saw consumer views towards the economy take a nosedive. People felt really bad about the economy. They were very unhappy about inflation, but at the same time, total spending in the US, aggregate consumer spending, actually remained fairly robust in the post pandemic.

So this was a little bit of a puzzle. However, there were actually a lot of economic relationships that kind of broke down after the pandemic. So traditional indicators or leading indicators for a recession, including what’s known as the inverted yield curve, or an indicator for recession called the Sahm rule, both of these relationships didn’t quite work as historically seen after this pandemic.

One of the possible explanations for this is right after the pandemic, even though inflation was high and people were really unhappy about it, labor markets were really strong during that time. So even though they hated spending in a high price environment, they actually had the incomes to support it.

A second factor that people often don’t realize is that it is true that national sentiment was pretty low in 2022, but right after that, as inflation started to slow down, sentiment confidence for the highest income consumers actually recovered fairly quickly.

It rose pretty steadily over the next couple of years, whereas for people at the bottom of the income distribution, their sentiment, their confidence continued to stagnate. And in fact, higher income, higher wealth consumers are precisely the ones that generate the vast majority of total consumer spending.

So in reality, consumers continue to connect their behavior to their underlying feelings about the economy, and we’re seeing that right now as well. Sentiment converged for high wealth and low wealth people in the middle of last year. When tariff tariff announcements hit their peak, everyone was really worried about tariffs.

But since then, higher wealth consumers, those with the largest stock portfolios, their sentiment has recovered because they’ve been supported by soaring stock market values. But if you don’t own any stock, you’re not really affected by the fact that the Dow Jones has reached another peak. Your sentiment has been really low.

So while it is the case that we have low sentiment right now, even when stock markets are soaring, consumers’ aggregate consumption is still steady. But it also some pretty big differences under the hood within the population.

Juan Ochoa:

The University of Michigan Surveys of Consumers that came out in late January showed a modest uptick in buying conditions for durable goods, yet nearly 40% of the consumers were citing tariffs as a top concern. How do you read that?

Joanne Hsu:

So tariffs have been the top thing on people’s minds when it comes to the economy for the past year, since the election finalized. Consumers have been really concerned that tariffs are going to lead to price hikes that pass through to what consumers actually have to pay. And they are also really worried that tariff policy is something that could inject, that has injected quite a bit of uncertainty into the economy. And there’s an understanding that when there’s uncertainty, it’s hard for businesses to plan. It’s also hard for consumers to plan.

Now, it is true that durable goods buying conditions were not, goods may have improved in January, but they’re still at historically very low levels. So it’s a little bit better than it was before, but it’s still not good by any stretch of the imagination. Indeed, at this point, consumers think it’s too late really to avoid any tariff related hikes. I think there’s an understanding that a lot of tariff policy that was threatened in the middle of last year, some of it has been rolled back, but we’re in a new tariff regime. We’re in a higher tariff situation than we were a couple of years ago, and consumers understand that as far as we can see not going away.

Juan Ochoa:

What can consumers do to feel more calm about it?

Joanne Hsu:

The number one factor on consumers’ minds is the persistence of high prices, and tariffs are a major factor for that. Inflation, however, has come down. So inflation being the rate of change of prices, as opposed just to the price level itself.

So inflation has slowed down quite a bit since 2022, but that doesn’t mean prices have come down, prices have remained high, and that’s something that consumers continue to be very frustrated about. And so, the thing is we all want prices to come down, but historically-speaking, it’s really hard for prices to come down without something catastrophic happening in the economy, like a major recession.

And a major recession will surely affect everyone in a very negative way. So, I think sometimes it can be hard for people who watch the macroeconomy, including policymakers, to square the fact that inflation has come down, but people are still so unhappy about how prices are eroding away their living standards.

Juan Ochoa:

You mentioned recession, and that’s a scary word, but inflation lifted the prices of many consumer goods in the past couple of years. How do you see consumers responding to these additional budget constraints in the survey?

Joanne Hsu:

High prices, inflation is something that affects all of us one way or the other. We can’t avoid it, and we have seen consumers really start to adjust to this. It’s actually hard to see when it comes to GDP growth. I already mentioned that consumer spending’s about 70% of GDP. GDP has been growing fairly steadily over the past year, so we haven’t actually seen much of a pullback in consumer spending from a national level, but that’s looking at total spending across the country.

What that doesn’t show is the fact that a lot of consumers are changing how they spend, maybe their total dollar spent is not really changing, but they are changing how they spend their budgets. So we’re seeing a lot of earnings reports from different companies that are showing evidence that people are trading down. They are switching, substituting away from more expensive goods and doing more spending on lower cost items.

And that’s consistent with the fact that Walmart is doing really well right now, whereas companies that are higher up on the price ladder are not doing nearly as well. So it’s pretty clear evidence that consumers are responding to these feelings of strain coming from the persistence of high prices by being cautious and choosy about how they spend their money.

Juan Ochoa:

I just bought some bird food last night and I probably should have saved that money. Looking in the past index numbers, have there been any shifts in how Americans are managing their budgets that might surprise those of us just looking at the headlines.

Joanne Hsu:

So total spending hasn’t dropped off as much as one might expect, given how bad people feel about the economy. And so, one of the things is that, again, total spending might be held the same, but people aren’t necessarily spending the same way. They might be spending the same amount of money, their total budget may be the same, but they’re changing how they spend their money.

I think one of the interesting things is that few of the categories that have seen a lot of inflation and have persistently high prices are things like the cost of housing, the cost of insurance, the cost of education, particularly college higher ed. And besides higher ed, everyone needs some sort of housing. Insurance is also really critical to us. And what that means is, if those categories get really expensive, people are having to pull back somewhere else.

And so, we’re seeing despite this low level of confidence, people are maintaining their spending from now. But again, it looks like that this is very much being driven by the upper end of the income and wealth distribution. People who are very wealthy, who have high incomes and stable jobs, they’re not expecting to lose their jobs, they’re still supported. They still have support in their budgets and they’re still able to spend well. So if people at the top of the income or wealth distribution are not altering their spending much, that would be another reason why we’re not seeing much of a pullback on the aggregate.

Juan Ochoa:

Based on the trends, what are you seeing that is most surprising?

Joanne Hsu:

One of the things that you won’t necessarily notice if you’re just looking at the headline, right now, we have readings in the 50s. These are pretty low readings, comparable to 2022 when we got our all time historic low in June when inflation would at its peak. You don’t realize that actually consumers see a very different economy now in 2026 than they did four years ago.

Mainly, they’re seeing a huge difference in labor markets. So in 2022, labor markets were incredibly strong. Anyone who wanted a job could probably find a job opening somewhere. We were calling it the Great Resignation. People were job hopping, unemployment was very, very low from a historical perspective.

Now, fast-forward to 2025, the big trend from a year ago to now has been a pretty severe deterioration in how people see labor markets. The share of people who expect unemployment to go up, it doubled between last January, January 2025 and this year. So consumers are really seeing a darkening on the horizon with respect to labor markets.

And they’re also, it’s not really a problem, it may not be a problem to have unemployment that goes up if you yourself are not affected. You might think that, “This is a problem that other people face, but my job is secure so I can just keep spending.”

Increasingly, that’s not what we’re seeing in the data anymore. We have a specific question on, “What’s the probability you or your spouse will lose a job in the next five years?” And that has gone up a lot in 2025 and the beginning of 2026. So people are not only worried that national unemployment is going to rise, they are increasingly worried that they themselves might be affected. And that is a pretty big difference that you wouldn’t necessarily see just from the headline.

Juan Ochoa:

Yeah, I have a family member who recently lost their job, and they’ve applied to at least 200 and they still haven’t even heard back for an interview, which is pretty scary.

Even with a steady GDP growth, a lot of consumers still seem uneasy about the labor market. How much of an impact do you think this caution around job security will have on actual spending habits over the next few months?

Joanne Hsu:

So at this time, unemployment remains fairly low, but consumers hold a pretty strong belief that it is going to get worse in the future. And if that comes to bear, I would expect them to react with how they manage their pocketbooks. In 2022, we definitely saw that people were willing to spend, even though they hated it, and they were feeling really negative about the economy, because they had the incomes to support that spending.

Now we’re in a completely different situation. There’s a consensus that labor markets are much weaker now than they were a few years ago, and our data show that consumers are continuing to expect labor markets to worsen and unemployment to go up. So if consumers start having to worry about how much income they’re going to have in the year ahead, they are going to be less likely, even less likely to want to spend.

So, I’ve already talked about how there’s evidence that consumers have been trading down what they spend, they’re being choosier about what they spend, but they haven’t necessarily pulled back their total spending that much, at least on aggregate. We very well could see a larger pullback if people just don’t know if their incomes are going to be secure.

We are seeing more signs of financial strain in other economic data. Delinquency rates on loans are starting to pick up. They’ve been picking up and are continuing to pick up, and consumers are getting increasingly worried. There are news about layoffs all the time. Job openings are very, very low right now, which I think even with low unemployment, it could be the case that if you have a job, you may be secure, at the moment you might be secure, but if you don’t have a job like your family member and you’re looking for one, this is a terrible time to be looking for a job.

So, I would be watching labor markets going forward. There are signs of weakness, even though unemployment rates are still pretty low, but if we continue trending in this weakening direction, it seems difficult to find a way for consumers to maintain their spending for most of the population.

Again, we’re still seeing that wealthy people, people with the largest stock portfolios, they are feeling okay about the economy, so they tend to spend a lot of money. So aggregate spending can be supported by that group, but just in the last couple of weeks, I don’t know when this is going to air, but in the last couple of weeks we’ve been seeing a lot of volatility and movement in stock markets. And so, that is not a sure thing either.

Juan Ochoa:

I don’t have a large portfolio, but I’m certainly going to be watching my spending. One-year inflation expectations dropped to 3.5% in February, but long-term views actually moved up slightly. Does this suggest consumers believe price relief is only temporary?

Joanne Hsu:

Consumers really don’t like inflation. However, they have noticed that inflation has come down. As you said, we’re at about 3.5% for year ahead inflation. That is much lower than what we were seeing in the middle of last year when tariff rhetoric was at its peak.

So, consumers are aware it has slowed. However, inflation expectations both in the one-year horizon as well as the 5 to 10-year horizon are still higher than they were in 2024 and also before the pandemic. So consumers don’t necessarily think we’re completely out of the woods yet. Those long-run inflation expectations haven’t returned to where they were before. This all started.

Juan Ochoa:

Joanne, we’ve reached the end of our session, but what do you want our listeners to take away?

Joanne Hsu:

That your views matter. Your views matter for the economy, and we’re here to collect it. People are watching the data closely, and I’m really proud to be in this position where I can bring the voice of American consumers to decision makers, policy makers, and businesses. So if you receive an invitation to the survey, I encourage you to take it.

Juan Ochoa:

Well, thank you. Thank you for joining us today, and hopefully the economy turns to a positive point.

Joanne Hsu:

That’s what I’m hoping for, too.

Juan Ochoa:

Thank you for being here.

Joanne Hsu:

Thank you.

Juan Ochoa:

Thank you for listening to this episode of Michigan Minds, produced by Michigan News, a division of the university’s Office of the Vice President for Communications.