Trump's victory sparks consumer confidence surge
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Illustration: Maura Losch/Axios
After years of wondering why there was a disconnect between how Americans feel about the economy (bad) and the actual state of the economy (pretty good), we may have the answer — it was politics all along.
Why it matters: If politics is the main driver of consumer sentiment, then it's no longer nearly as useful as an economic indicator.
The big picture: A real-time measure of consumer sentiment abruptly turned positive last week for the first time since June 2021, as Republican optimism surged on Donald Trump's victory. (See the chart below.)
- Overall sentiment hit 100.6 on Nov. 11, according to the Morning Consult Consumer Sentiment Index. (Anything over 100 is positive.)
- Heading into the election, Republican sentiment was negative (around 83), as it had been essentially since Biden entered the White House. It spiked to 107.5 in the days after Trump won.
- Democratic sentiment fell at the same time, but the drop was mild in comparison and the overall index still turned upbeat.
- "It's pretty clear politics was a big part of it," says Ben Harris, vice president and director of economic studies at the Brookings Institution.
Flashback: For many years, consumer sentiment was an important leading indicator for investors and economists. It could foreshadow a coming recession faster than other economic data that take longer to come out.
- "If an economic forecaster were trapped on a desert island with only data on consumer confidence," using this measure to hazard a guess about the economy "would not be a bad idea," concludes an explainer from the Federal Reserve Bank of St. Louis published in 2003.
Zoom in: Since the pandemic, the measure's usefulness stumbled.
- Even with low unemployment, falling inflation and a growing GDP, consumer sentiment has been at levels last seen during the Great Recession.
- The disconnect led to the coining of a new term, "vibecession," to describe Americans' dismal mood.
- "The fact that macroeconomic indicators have become so divorced from consumer sentiment, it's reasonable to ask does this even matter from an economic standpoint anymore?" asks Brookings' Harris.
How it works: Both Republicans and Democrats see the economy more favorably when their party controls the White House, but the GOP skew is far more pronounced.
- That's per an analysis of University of Michigan sentiment data from two Stanford economists published last year.
- The Republican partisan bias is two-and-half times larger than it is for Democrats, write Ryan Cummings and Neale Mahoney in their paper.
Put another way: "Republicans cheer louder when their party is in control and boo louder when their party is out of control," they write.
Reality check: That asymmetry explains 30% of the difference between observed consumer sentiment and what you would predict using economic fundamentals, Cummings and Mahoney found.
- Inflation explains another chunk. Even though the rate of inflation has fallen quite a bit this year, consumers are still adjusting to higher price levels. It's a process that takes a few years.
- "Most people have adjusted to the fact that a Coke costs more than a nickel," Mahoney, Cummings and Harris wrote in a paper for Brookings.
- Other factors contributed to the sentiment slump that economists still don't fully understand. In the Wall Street Journal, Greg Ip wrote about "referred pain," or pessimism about the economy that may "reflect dissatisfaction with the country as a whole."
What to watch: It's still early days, so we'll be watching post-election data closely as it comes in.
- The University of Michgan's survey looking at sentiment in November will be released on Nov. 22. (This is the best-known consumer sentiment measure.)
The bottom line: If the gloomy data was just about partisanship, "then the vibecession was really just vibes," Kyla Scanlon, author of "In This Economy?" who coined the term, tells Axios.
