Scar Tissue and Consumer Sentiment

Throughout 2025—and even a bit earlier—major financial publications have been chock full of deep dives exploring what they consider a landmark split. Consumers’ perceptions of the economy (as expressed in surveys like the University of Michigan’s or The Conference Board’s) are dire. But output metrics show growth and stocks hover near all-time highs. They sweat the alleged disconnect—and worry the sour sentiment is a harbinger of things to come. But a review of economic and market history reveals nothing noteworthy about this divide. Let us explore this.

To put some numbers to the division, consider December’s U-Michigan Consumer Sentiment Index. It sits at 52.9—below any reading in 2020, when many struggled to buy toilet paper.^[i] Or the 2007 – 2009 recession, which featured spiking unemployment and a generationally deep recession. Or during the dot-com bubble’s implosion and 2001’s recession. Or 1990 – 1991’s. And December’s reading is up from 51 in November!^[ii] Six of this gauge’s lowest historical readings have come in 2025—with November’s the second-lowest ever!

Yet stocks boomed. Consumer data show retail sales are up 3.5% y/y through October.^[iii] Real personal consumption expenditures—a broader and inflation-adjusted gauge of spending—rose 3.5% annualized in Q3, leading GDP’s surge to 4.3%.^[iv] Even inflation has slowed, regardless of whether you buy the “shutdown-skewed” November consumer price index’s 2.7% y/y read.^[v]

What gives?

To hear pundits tell it, this is an epic and huge divide; a chasm between what people say they feel or think about the economy and what they do. Many pen articles that hinge near-totally on sentiment gauges, downplaying activity-related econometrics. Plenty of pundits presume this is either a) new or b) troubling, which suggests they haven’t reviewed history.

Sentiment gauges are very often detached from reality. Seven of U-Michigan’s highest 10 readings came in 2000, as the Tech bubble burst and the 2001 recession approached. Sentiment was quite weak in 2011, yet the economy grew and consumers spent.

Or, more colloquially: Remember all the talk in the early 2010s of a “double-dip recession” or “jobless recovery?” Both were disconnected from reality. There was no double-dip recession, and unemployment went on to plumb historical lows later in the expansion. Or, take political strategist James Carville’s 1992 “It’s the economy, stupid” quip. He pinned the “recession” that election year on incumbent President George H.W. Bush. It seized the national zeitgeist—and the White House for Bill Clinton. One factual problem? The early 1990s recession was done and dusted in March 1991.^[vi]

Fourteen years ago, I wrote a column for a third-party website titled, “Are People Lying in Consumer Surveys?” The conclusion: No, they aren’t fibbing. They are accurately reporting their feelings. Thing is, feelings about the economy are fleeting and often just plain wrong. Emotions get rooted in headlines or recent stock market swings or any of many factors that prove temporary blips, which don’t foretell future behavior. You can’t pencil in future activity based on what a consumer told a pollster.

Are they lying now? I still doubt it. Human behavior doesn’t change very fast. Some of today’s excessively low readings are likely skewed by one of three factors: One, politics, which, blech. The U-Michigan survey’s gauges of partisan sentiment show there is very likely some divergent influence from this. Two, people’s general reticence to be polled or surveyed on just about anything, a factor that has plagued national statistical agencies in Britain and America in recent years.

But the biggest factor? People are just people, and people really hate the high prices that stemmed from inflation in 2022 and 2023. That is totally and completely understandable. Many expected or hoped for prices to fall, but they haven’t—and very likely won’t. The frustration is natural—and likely influences the sentiment readings.

Here is the thing investors have to note about this: To whatever extent it is souring consumer moods, it renders sentiment surveys hugely backward-looking. It is fighting the last war.

That is natural and human to do—emotional scars can take a long time to heal. The existence of such scar tissue, though, doesn’t tell you much about the economy today, where it is headed or what forward-looking stocks “should” be doing. Scar tissue is an aftereffect, just like historically dour consumer sentiment in surveys today.

Ultimately, the way to approach sentiment surveys today is the same as it has always been: Watch what consumers do, not what they say. Maybe that is doubly true when consumers are still so scarred.