The Daily: What the hell is going on with consumer sentiment?

On today's podcast episode, we discuss why it has become so hard to get a read on consumer sentiment, the indicators we pay closest attention to to try and make sense of it, and how we expect consumers to feel for the remainder of the year. Tune in to the discussion with host Marcus Johnson, director of Briefings Jeremy Goldman and analyst Zak Stambor.

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Episode Transcript:

Marcus Johnson (00:00):

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Jeremy Goldman (00:21):

If their ability and desire to purchase during high-traffic times like the Cyber Five, if that winds up continuing to grow, then I think that not necessarily don't just ask people what they're saying. Try to just get a gauge on what they're actually doing

Marcus Johnson (00:44):

Hey, gang. It's Monday, October 21st. Zak, Jeremy, and listeners, welcome to Behind the Numbers Daily, an emarketer podcast made possible by TikTok. I'm Marcus. Today, I'm joined by two folks. One of them is our senior retail analyst. Based in Chicago, it's Zak Stambor.

Zak Stambor (01:01):

Hey, Marcus.

Marcus Johnson (01:01):

Hey, fella. We're also joined by our senior director of briefings. He's based in New York City. It's Jeremy Goldman.

Jeremy Goldman (01:08):

Hey, Marcus. And happy Back to the Future Day.

Marcus Johnson (01:10):

Jesus, I should've known this was coming.

Jeremy Goldman (01:13):

You see-

Marcus Johnson (01:16):

No, because I'm from the future. [inaudible 00:01:16].

Jeremy Goldman (01:17):

No. Have you not seen the movies? Back to the Future, October 21st is the day where it happens.

Marcus Johnson (01:23):

Oh, is that the day?

Jeremy Goldman (01:24):

Yeah.

Marcus Johnson (01:24):

How do you know this stuff?

Jeremy Goldman (01:24):

So they celebrate Back to the Future Day today.

Marcus Johnson (01:29):

How do you come up with this stuff? Anyway, today's fact. That was a good enough one, to be honest, but I have a different one in case you want options. Which is the rainiest state in America? Any guesses here?

Zak Stambor (01:44):

I would say Washington, right?

Jeremy Goldman (01:46):

I don't think it is.

Zak Stambor (01:46):

No?

Jeremy Goldman (01:46):

I think that Washington is-

Zak Stambor (01:47):

It's very rainy.

Jeremy Goldman (01:49):

I think it's tricky because I think Washington doesn't have the total most number of drops or inches, but it rains the most number of days. But I think you mean total volume, right?

Marcus Johnson (02:01):

Yeah. So for this one, I mean annual precipitation levels.

Zak Stambor (02:05):

Okay, so I will go across the entire country and say Florida then.

Marcus Johnson (02:10):

Okay.

Jeremy Goldman (02:11):

Isn't Louisiana really high?

Marcus Johnson (02:14):

Okay, so I'll get to your guesses. The reason I'm asking this is because I'm currently in Portland, Oregon, and it's got a reputation for being a very rainy place. However, Oregon is not in the top 10 wettest states in the US. So I looked at data from the National Oceanic and Atmospheric Administration over a near 30-year span. The state climate summaries provided by the North Carolina Institute for Climate Studies and the mean annual precipitation levels using the data from the National Climate Data Center and found that I think Florida is top five, but Mississippi is the third rainiest state. Louisiana is the second and Hawaii is number one.

Zak Stambor (02:14):

Oh.

Jeremy Goldman (02:52):

Oh.

Marcus Johnson (02:53):

Yeah. But when you look at cities with the most rainy or snowy days, according to the National Centers for Environmental Information, Hilo in Hawaii is number one, where it rains 276 days per year. The next four cities are all coastal Alaska cities, each with about 230 days of rain per year. Portland, Oregon was 30th on the list with 153 days of rain per year. So 120 less than first place, and it was behind Syracuse in New York, Cleveland, and Pittsburgh.

Jeremy Goldman (03:29):

Huh. I didn't know Cleveland was so high.

Zak Stambor (03:32):

No, I definitely would not have come up with that.

Marcus Johnson (03:34):

Mm-hmm. Anyway, today's real topic, what the hell is going on with consumer sentiment? So that is the question we're going to attempt to answer here. It seemed as though a gang that you used to be able to look at a few key indicators, GDP, growth, inflation, unemployment, and get a fair read on how the average consumer felt about the economy and their own personal economy. But somewhere along the line, things changed. Because if you look at GDP growth, 3% in Q2. The Atlanta Fed GDPNow tracker projects GDP growth to improve to 3.2% in Q3. If you look at inflation, which called to 2.4% in September, its lowest rates in three and a half years, or if you look at unemployment, which hasn't been above 4.3% in three years, you'd be forgiven for thinking the economy was in decent shape. However, consumers aren't convinced. The University of Michigan's Consumer Sentiment Index used to live around a hundred points before the pandemic hit. In the last three years, it's hung out closer to 70. So a significant step change.

(04:43):

Zak, I'll start with you. Why do you think that it's become so hard to get a read on consumer sentiment, how they feel?

Zak Stambor (04:50):

So big picture, consumer sentiment used to track along a fairly stable-ish path. Until a recession, it would go up into the right pretty slowly, and then there would be a recession. It would plummet and then it would go up into the right again. And that happened that way with our little tiny recession in the midst of the pandemic until April 2021, and that's when inflation began to spike and we saw a recession-like decline.

(05:25):

And so I think what's going on is inflation is just really jarring for people. And for a whole lot of people who are middle-aged, they've never experienced inflation and they still don't really know how to process it. But they see that the bag of chips that they used to buy for $2 is now $5, and they're angry about that.

Marcus Johnson (05:53):

Mm-hmm. Yeah, that's what jumped to me as well, is that there is a direct correlation between inflation and consumer confidence. And I mean direct correlation. So in June 2022, inflation was at its highest point, but that was also the same month that the University of Michigan's consumer confidence Index was at its lowest point. Since then, inflation has come down from 9.1% to 2.4 as consumer confidence has gone up from about 50 points to about 70.

Jeremy Goldman (06:28):

But I think the key thing to build on what both of you are talking about is that it's great for inflation to be cooling pretty significantly, but if consumers are still wary due to rising costs of living, that makes things a little bit more iffy. It's this very weird mixed signals environment. There's a lot of economic and political uncertainty that has just made consumer sentiment harder to gauge than past periods.

(06:59):

And then also, by the way, there's diverging spending patterns between higher and lower-income groups that are skewing sentiment data. So depending on where you are in this economy, you're getting different answers. And I think that's always true, but I think it might be more true now than at various other points in the past.

Marcus Johnson (07:17):

Mm-hmm.

Zak Stambor (07:17):

I think that's true to some extent. The other piece that we haven't really talked about is both negative partisanship and an election coming up, which puts the focus on inflation. And there's a lot of talk of inflation and prices and price gouging, and all of that stuff makes people feel like, "Hey, I'm getting a raw deal." And it's coming, actually, from both [inaudible 00:07:44]. Both Kamala Harris and Donald Trump are both talking about high prices, and so consumers fairly reasonably are saying, "Yeah, prices are too high. What the hell?"

Marcus Johnson (07:17):

Mm-hmm.

Zak Stambor (07:56):

And so when they respond to a survey that asks them, "How do you feel about things?" they're not going to feel so good.

Marcus Johnson (08:01):

Well, so up to that point, it does feel as though perception is reality because to that point, two surveys here. Close to 60% of US adults say the economy is getting worse. That's nearly three times as many people who say it's getting better, 23% according to an October ABC News and Ipsos poll. And then second, 48% of voters felt the economy was worsening versus 34% who said it's improving according to an August Wall Street Journal survey.

Jeremy Goldman (08:29):

If you look also... Echoing that point but going one step further, think about all of the political ad spending, which we have at 12.15 billion for 2024. So for context, it was just 9.57 billion in 2020, just four years ago. And that is a lot of reinforcement of this message that we're talking about now in people's faces. And what does that spend go to after the election? It drops pretty dramatically, and I don't think anybody's surprised about that. And then if that message is not in people's faces all the time, does that help influence perception? I would be very surprised if it doesn't have any impact. Irrespective of who wins, that will just be less of a talking point in society to some degree.

Marcus Johnson (09:19):

Yeah.

Zak Stambor (09:20):

One other piece that we haven't talked about is people feel like inflation, rightly so, is out of their control. When the price of whatever it is rises, it seems jarring. But when they get a raise to help them deal with those rising prices, they feel like they earned. And so even though all of those indicators that you ran through are pointing in a positive direction, the economy is good, people feel like, "Hey, I earned my raise. The bag of chips is still $5. What the hell?" And so that makes people feel not so great.

Marcus Johnson (10:03):

Yeah, and I was looking. Household incomes just rose last year for the first time since COVID. According to the US Census Bureau, inflation-adjusted median household income was around 81,000 in 2023. That's up 4% from 2022, close to 78,000. And this returned incomes to about what they were in 2019. So people are probably feeling like they've been standing still for the last four years in terms of income.

(10:33):

I want to touch on something, Zak, that you said, which is that people, they're not used to this level of inflation. And they really aren't used to this level of inflation. Even during the Great Recession in 2008, inflation was like five, 6%. You have to go back to 1980 before you start to see double-digit levels of inflation. And so people aren't quite sure what to expect or what to do when that happens. And consumer sentiment is improving, but there's a lag. So it's 8% stronger than a year ago, and it's 40% above the low point it reached in June 2022. Prices has been high for so long, it's going to take time for these inflation declines to start to take the edge off.

(11:14):

And two folks who are echoing that sentiment. University of Michigan survey director Joanne Hsu saying, "Whilst inflation expectations have eased substantially, consumers continue to express frustration over high prices." And then chief economist at US Bank, Beth Ann Bovino, cautioned that Americans are still feeling the pinch from the cumulative effects of price increases and high interest rates. And for many households, they still don't feel it, referring to the effects of easing inflation.

Zak Stambor (11:41):

Yeah, and I think lots of people just don't quite understand inflation totally. They expect when inflation wanes, prices will go down. But that's not the way it works.

Marcus Johnson (11:41):

Mm-hmm.

Zak Stambor (11:55):

It just is growing at a slower pace for the most part. Certainly, there are certain one-off categories that may have deflationary cycle, but the feeling of prices rising is disproportionate to the feeling of inflation weight. So I think that's largely what explains consumer sentiment are below where it was [inaudible 00:12:24].

Marcus Johnson (12:24):

Mm-hmm. Yeah.

Jeremy Goldman (12:25):

There's also, by the way, a number of different things that we haven't really pointed to, which is no indicator is perfect forever. So are we thinking about credit card delinquency rates, or is that something that we should be concerned about and pay more attention to in the future? The University of Michigan index, that's something that obviously has been a hallmark of sentiment for a while now, and things change. I mean, core retail sales growth, is that something that is just not going to be as good of an indicator in the future as it has been?

Marcus Johnson (13:03):

Yeah.

Jeremy Goldman (13:03):

And then also, by the way, holiday shopping trends, because I know Zak and his team have written a lot about this, especially for high-demand periods like the Cyber Five. I mean, if people say that their sentiment is not that great, but then if their ability and desire to purchase during high-traffic times like the Cyber Five, if that winds up continuing to grow, then I think that not necessarily don't just ask people what they're saying. Try to just get a gauge on what they're actually doing.

Marcus Johnson (13:34):

Mm-hmm.

Zak Stambor (13:34):

Yeah, that's right. I tend to focus on what I call show, don't tell metrics, which is retail sales. It's things like the JOLTS data, which is job openings and labor turnover. I focus on the employment rate, all these things that are real numbers that you can wrap your hands around and see how either consumers are behaving or how businesses are behaving to get a sense of what's actually going on.

Marcus Johnson (14:04):

Mm-hmm. So speaking about what indicators to pay closest attention to try and get the best read on the economy, I think two have a significantly outsized impact on how people feel. I think these two I'm going to talk about in a second probably account for 60 to 70% of consumer sentiment. So let me lay this out, and I wonder what you guys think if you agree or disagree or if there are other things that you think should be included in this concoction.

(14:31):

So food prices specifically. So we talk about prices, but food prices, I think, are one significant bellwether. 86% of consumers are frustrated with the rising cost of grocery shopping, according to an R. R. Donnelley & Sons survey. And food price is something we look at every day, so we're hyper aware of prices going up. They're up 28% since 2019, so they're up significantly. That's according to a note from Taryn Phaneuf of NerdWallet. And according to the US Bureau of Labor Statistics, food inflation before the pandemic from, say, 2012 to 2019 averaged about 1.5%. Since then, 2020 to 2023, it's averaged close to 6%. So it's four times higher than what folks have been used to. Now, it's average about 2.2% this year. But I think people are so shell-shocked from the previous four years, it's going to take a while for them to feel that these prices are real and that they can be trusted and they're going to be low for more than a couple of months.

(15:29):

And then the second thing here is gas prices, and they're giant price billboards that are always front of mind because you see them everywhere. From 2015 to 2020, gas prices in America averaged about $2.40 a gallon. Since then, they've been closer to $3.50 a gallon, which is 45% higher than what folks were used to do pre-pandemic. Gas has come down from 3.81 about a year ago to 3.31 for a gallon of regular today, according to the Energy Information Administration, but that's still a lot higher than what folks are used to. So I think food prices and gas prices, probably responsible for about 70% of how people feel.

Zak Stambor (16:07):

Yeah, I think that's right. And then housing would be the other big one.

Marcus Johnson (16:08):

Mm-hmm.

Zak Stambor (16:11):

If your rent is going up quite a bit, you're going to feel [inaudible 00:16:14].

Marcus Johnson (16:14):

Yeah, yeah.

Jeremy Goldman (16:15):

And also, by the way, the element of savings, if people have more uncertainty in the job market. And depending on what sector you're in, you might feel great about getting a new job. You might not. But just there was an element of people saving up at a certain point during COVID and then draining through those savings and seeing that number go down. That's something that I think naturally causes a bunch of anxiety for some people.

Marcus Johnson (16:39):

Yeah. The rent one, though, is interesting, Zak, and I agree with you. But it's one that's a bit more discreet because I don't feel like people talk about rent prices unless you're on Zillow all day long. It's hard to know what your rent looks like compared to others whereas with food prices, I feel like it's a shared conversation amongst society because we can all see them together.

Zak Stambor (17:03):

Yeah, no, I think that's true. I think that is true. It's an annual increase generally.

Marcus Johnson (17:09):

Mm-hmm.

Zak Stambor (17:09):

The other one is energy.

Marcus Johnson (17:11):

Mm.

Zak Stambor (17:11):

In the UK, certainly we saw that happen. When energy prices spiked, consumers felt horrible and stopped spending money. And that's just an everyday expense that you can't avoid.

Marcus Johnson (17:23):

Yeah. And that's certainly a topic of conversation amongst folks, especially back in the UK. Remember when that was going on, a lot of people, when I'd ask them how things are, so that would be the topic of conversation.

(17:35):

On food prices, quickly though, they do seem to be improving. Lynn Petrak of Progressive Grocer was noting the recent survey from consumer research platform, Attest, showing 33% of shoppers buying cheaper food to rein in costs. It's a lower share than two years ago, which is positive. And then 26% of consumers said they were trying to buy less food. That's also a lower share than two years ago.

(17:57):

Jeremy, you quickly touched on this earlier in the episode, which is looking ahead to... We're already in October. November and December we refer to as the holiday period. And so what do we expect consumer sentiment to look like for the remainder of the year? Zak, I'll start with you because I believe that you've covered this the most to what Jeremy was saying.

Zak Stambor (18:17):

I think it's going to be a lot of eh.

Marcus Johnson (18:21):

Mm.

Zak Stambor (18:21):

We have the election. Roughly half the population will be really irritated by the result, and there's virtually nothing else that could happen that would give those people who are upset a reason to feel positive.

Marcus Johnson (18:40):

Jeremy, agree?

Jeremy Goldman (18:41):

Yeah, I think it's worth noting that one group might win the popular vote and then not have their candidate win, which is a big deal because electoral votes do not purchase things. Individual human beings do. So you obviously don't want to have over half, let's say, the populace a bit bummed out during the holiday period. But then again, you might have... There's such a thing as revenge shopping, and I think that I can see people just getting their minds off of some things and leaning into some other categories like travel, let's say, spirits and beer sales. I think that that'll be interesting to look at.

(19:21):

But we do have our... Going back to what I was saying about Cyber Five, expecting those to increase by 5.6% year over year, although it is worth noting that these days will make up a smaller portion of overall holiday sales because of holiday creep and early promotions. And I know Zak, you've written a lot about this, about how retailers have been pushing sales forward just to capture those very early in the season, in part because of the election. But then again, if you're expecting consumer sentiment to be so bad and so off, you wouldn't necessarily try to move the sales up all that early, right? I mean, that would be an argument to push it back and see if sentiment improved.

Marcus Johnson (20:03):

Mm-hmm.

Zak Stambor (20:03):

Well, yeah, that's right, because sentiment doesn't align with sale. That's been the disconnect that we've seen. Retail sales is fine. I mean, if you pull out the auto and energy sale, core retail sale are up 3.6%, that's pretty good. That's ahead of inflation. Consumers are still spending. They just don't feel great. And so I suspect that will continue through the end of the year and into the holiday season. Consumers will spend. They just won't feel that great about it.

Marcus Johnson (20:36):

Yeah. Yeah, we're pretty positive on what we expect to see in terms of sales for the holidays. We expect an increase of close to 5%, 4.8 year on year in the last two months of 2024. That's a one-point bump on the same period a year ago. Online shopping, a driving force of that, expected to grow nearly 10% year on year in the November-December holiday period.

(20:59):

But to what we've all been saying, and Zak you just a second ago, people just don't feel great. And prices have been high for so long, folks aren't ready to believe their eyes when it comes to the recent lowering of inflation. And there was that University of Michigan survey saying that people actually expect prices to climb to 3% over next year. So they are apprehensive that yeah, they are lower than what they've been, but how long will that last? It does seem as though people need more good news before they fling open their pocketbooks. And according to that same survey, looking at home buying conditions, concerns about high interest rates fell to the lowest in 15 months, but a majority of folks still see borrowing costs as too high, and they just need more before they start spending. Not even spending, but before they start feeling good about themselves and, just like I said, their personal economy.

(21:49):

That's all we've got time for, gents, for today's episode. Thank you so much for hanging out with me today. Thank you so much to Zak.

Zak Stambor (21:54):

Yeah, thanks for having me.

Marcus Johnson (21:55):

Yes, indeed. Thank you to Jeremy.

Jeremy Goldman (21:56):

Thank you. I'm going back to my Back to the Future marathon, starting now.

Marcus Johnson (22:01):

Well played. Thank you to Victoria who edits the show, Stuart who runs the team, and Sophie who does our social media. Thanks to everyone for listening in of course. We hope to see you tomorrow for the Behind the Numbers Daily, an eMarketer podcast made possible by TikTok.