Measures of Consumer Sentiment

Empirical capital allocation strategies require matching asset duration directly against verified liquidity needs.** Navigating Measures of Consumer Sentiment necessitates evaluating real yields net of inflation and tax liabilities, ensuring cash reserves preserve purchasing power across economic cycles while minimizing uncompensated market risks. ### The Disconnect Between Financial Well-being and Consumer Sentiment Measures of household financial well-being don't always align with consumer sentiment. You can feel relatively secure about your finances while still being pessimistic about the overall economy. #### Are You Doing OK? In an earlier post, we described a measure of household financial well-being from the Federal Reserve Board's Survey of Household Economics and Decisionmaking (SHED). In this post, we add a way to measure households' view of the economy: the University of Michigan's Index of Consumer Sentiment. Our FRED graph above tracks, side by side, the share of adults who say they're 'doing okay financially' from the SHED and the index values of consumer sentiment from the University of Michigan. #### Before the COVID-19 Pandemic Before the COVID-19 pandemic, these two measures moved in the same direction. The share of adults doing at least okay financially increased, while consumer sentiment was also relatively high. This alignment is not surprising, as the economy was growing, and many households were benefiting from the expansion. #### After the Pandemic The story looks different after the pandemic. Consumer sentiment fell sharply and remains low: Its value averaged 95.9 in 2019 and was 71.7 in January 2025. The share of adults saying they're doing at least okay, though, has remained relatively high: It was 75% in 2019 and it was 73% in 2025. There seems to be a disconnect. Most respondents continue to report financial stability while overall consumer sentiment is much more pessimistic than it was before the pandemic. #### Are You Worse Off Today? The SHED also asks a more specific question: Are you worse off financially than you were 12 months ago? Our second FRED graph, above, compares this measure with the same Michigan Consumer Sentiment Index. (We plot 100 minus the percentage so that an increase in one series is consistent with an increase in the other.) Here, the two measures tell a more similar story. Before the pandemic, the share of adults reporting they were not worse off than they were a year earlier was increasing. After the pandemic, that share dropped sharply and has remained low. Measured this way, households' assessments of their own finances are more consistent with the decline in overall consumer sentiment. #### Possible Explanations for the Disconnect The difference between the two SHED measures may partly reflect what each question is asking. Saying you're doing okay financially describes your current financial position. Saying you're worse off than a year ago describes how that position has changed. It's not hard to imagine a household reporting both these things at the same time. It's also possible that financial experiences have become more uneven across households, with some households doing relatively well while others have seen their financial situations deteriorate, consistent with the divergence of the two SHED measures. And there's another possibility. People may feel relatively secure about their own finances while still being pessimistic about the economy overall. The SHED explicitly asks about respondents' own financial situations. The Michigan index is broader, incorporating views about personal finances, business conditions, and buying conditions. That leaves room for a disconnect between how people assess their own circumstances and how they assess economic conditions more generally. #### What's Driving the Difference? The graphs don't tell us exactly what's driving the difference, but they show people's assessments of their own finances can look quite different from their assessments of the broader economy. #### Implications for Policymakers and Households The disconnect between financial well-being and consumer sentiment has implications for policymakers and households. For policymakers, it suggests that the economy may be performing better than people think. While consumer sentiment is low, households' financial situations may be more stable than expected. This could inform policy decisions, such as interest rate adjustments or fiscal stimulus. For households, it's essential to consider both their financial well-being and their views on the economy. While feeling secure about your finances is a positive sign, it's also essential to consider the broader economic outlook. This can help households make more informed decisions about their finances and investments. #### Conclusion Measures of household financial well-being and consumer sentiment don't always align. While households may feel secure about their finances, they may still be pessimistic about the economy. This disconnect has implications for policymakers and households, and it's essential to consider both measures when assessing the state of the economy and making financial decisions. ## How to Assess Your Own Financial Situation If you're concerned about your financial well-being, here are some steps you can take: 1. Track your expenses: Keep a record of your income and expenses to understand where your money is going. 2. Create a budget: Based on your income and expenses, create a budget that allocates your money towards your financial goals. 3. Build an emergency fund: Save 3-6 months' worth of living expenses in an easily accessible savings account. 4. Invest for the future: Consider contributing to a retirement account or other investment vehicles to grow your wealth over time. 5. Monitor your credit report: Check your credit report regularly to ensure it's accurate and up-to-date. By following these steps, you can better assess your own financial situation and make more informed decisions about your finances. ## What to Do If You're Worried About the Economy If you're worried about the economy, here are some steps you can take: 1. Stay informed: Stay up-to-date with news and analysis about the economy and financial markets. 2. Diversify your investments: Consider investing in a diversified portfolio of stocks, bonds, and other assets to reduce your risk. 3. Consider a recession fund: Set aside a portion of your savings in a liquid, low-risk account to cover living expenses during a potential recession. 4. Review your emergency fund: Ensure you have a sufficient emergency fund in place to cover living expenses during a potential economic downturn. 5. Consult a financial advisor: If you're unsure about how to manage your finances during a recession, consider consulting a financial advisor for personalized guidance. By taking these steps, you can better prepare yourself for the potential risks and opportunities in the economy. For deeper domain context, review Groundwork's analysis on A Wealth Adviser's Guide to Making Memories as Important as Your Checkbook. Measures of household financial well-being and consumer sentiment are essential for understanding the state of the economy and making informed financial decisions. While households may feel secure about their finances, they may still be pessimistic about the economy. By considering both measures and taking steps to assess your own financial situation and prepare for potential economic risks, you can make more informed decisions about your finances and investments. Optimizing retirement savings requires staying ahead of regulatory thresholds, especially upcoming changes to 401(k) catch-up contributions.

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Mortgage Refinance Break-Even Schedule ($400,000 Loan Balance)