Platypus Economics | The Hidden Force Dragging Down Consumer Sentiment

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0:55Mike and his guests offer their perspective on how policy changes could affect what you do with your portfolio. Download the latest episode and follow at schwab.com slash Washington Wise, or wherever you listen. Hey everyone, it's Mary. It is a holiday for us at Slate, so we're off. But before I leave you to your vacation, hopefully, I've got a question for you. Do you feel as though your money is a little tighter than usual? That everything is more expensive? That our economic outlook is a little bleak, you are not alone. And yet, according to the data, the economy is still not that bad. How is that possible?

1:34Today, we're running an episode of Platypus Economics with Justin Wolfers, where he's going to answer that question for you, or try to. Here's Justin.

1:48Every couple of weeks, someone on cable TV sits me down, points a camera at me, and ask the exact same thing. Our economic statistics look pretty good, so why are Americans so gloomy about the economy? Earlier this year, consumer sentiment hit its all-time low. It's bounced around a bit since, but it's still sitting at the sort of level you might think would be a serious economic crisis. So what's going on?

2:19I'm Justin Morfus. This is Platypus Economics, and we're here to help you better understand the forces shaping your life. And today I'm here to crack the case of why so many folks feel so pessimistic, even as our economic statistics suggest things aren't that bad. But before we get there, let me show you the puzzle. Let's go back to May of 1980. Consumer sentiment was pretty low. It was 52. This summer, it's at almost exactly the same level of 52. These two periods, they're decades apart. They have almost identical levels of pessimism. But in 1980, unemployment was nearly 8%. Today, it's about half that.

3:03In 1980, inflation was running around 14%. Today, it's roughly a quarter of that. So why do Americans feel almost exactly as bad about the economy now as they did back then when prices were rising at breakneck speed and work was almost impossible to find. Let's unravel this mystery together. We're going to start with the puzzle. Then I'm going to introduce you to my prime suspect. Spoiler, it's what Americans think about how our government is managing the economy. Then we'll put that theory through the hardest test I know. Can data from the past predict what's coming next? And finally, because every good mystery needs the alternative suspects to all be ruled out, We're going to ask if there's something else that could explain these facts a little better.

3:47I reckon there's not. Okay, let's begin. The first clue about what's going on is hiding inside the survey itself. It comes from understanding consumer sentiment. Now, my colleagues at the University of Michigan, they measure this by asking people five questions. How are your finances compared with a year ago? How will they be a year from now? What will business conditions be like next year? What about five years from now? and is now a good time to buy a big household item. You'll notice a lot of these items, they're about asking people to look ahead. So consumer sentiment picks up not so much the economy people are living in today, it also picks up how they feel about where their lives are headed.

4:28For most of the past half century, if you want to understand consumer sentiment, it was probably enough to understand what was going on with inflation and unemployment. When prices rose too fast or jobs got hard to find, people felt worse. That makes sense. If your grocery bill is outrunning your paycheck, or if you're worried about keeping your job, the future looks a whole lot shakier. But that's why today's sentiment numbers are so puzzling. To explain this, I built a little historical benchmark. I asked, given the inflation rate and the unemployment rate in every month back to 1978, where would you predict consumer sentiment should normally be at a time like this?

5:04So for summer of 2026, the benchmark says, given the state of our actual economic indicators, consumer sentiment should be at about 82. The actual number was 52, 30 points lower. That's the mystery that we're trying to solve. The standard economic numbers like inflation and unemployment simply can't make sense. Standard economic statistics are leaving a huge part of what Americans are actually experiencing unexplained. So where should we look next? Well, the same Michigan survey asked one more question. It would ask a bunch more, but there's one that really got me interested. It asked people whether they think the government is doing a good job, a fair job, or a poor job on economic policy, specifically on fighting inflation and unemployment.

5:50I'm going to call that answer America's verdict or confidence in our economic managers. I'm going to give you some numbers today, so I just want to do a little bit of subtraction so that we can all understand what those numbers mean. I'm going to take the share of people who say the government's doing a poor job in economic management, and I'm going to subtract the share saying they're doing a good job. So when this number rises, Americans are handing down a harsher verdict. In late 2024, the verdict was 14 % more people thought that the government was doing a poor job than a good job. By May of 2026, it had reached plus 66%.

6:27That's the highest reading in the history of this question. And it's the highest by a lot. The previous record differential was 52. And that occurred during the 2011 debt ceiling crisis with 14 points over where we were during that crisis and our previous worst ever moment. Now, Kevin Hassett, who runs the White House National Economic Council, happy Kevin to his mates. He went on Face the Nation with his own diagnosis. He said, quote, I actually think that we should stop calling it consumer sentiment and start calling it political sentiment. Look, he's just trying to dismiss an uncomfortable fact.

7:03But hey, happy Kevin, there is something to what you're saying. People's views of the government shape how they think about the economy. And right now, they're not smiling as much as you are. Even if you call this political, well, it's trust in our economic managers. Calling it political doesn't make it imaginary. If you think that the government's choices are likely to make prices higher or jobs less secure, borrowing more expensive or planning for the future harder, that's an economic judgment. It might be shaped by your party. It might be shaped by policy news. It might be shaped by the price of the pump.

7:34It's still a judgment about how much faith we have in you and your colleagues about our economic future.

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9:41Hey, let me show you how all this plays out in the data. Pay attention because this might get a little bit tricky, but I'm going to try and be clear. I'm going to take the time series, the history of consumer sentiment. Now, we know a lot of the ups and downs in consumer sentiment have to do with the state of the actual economy. So I'm going to take out the ups and downs that can be explained by inflation and unemployment. And what's left? What's left is basically the puzzle. why is consumer sentiment moving even when the economy's not moving? And so what I'm going to do is plot next to that Americans' verdict or confidence in the competence of our economic managers.

10:18Hey, what do you know? The two move together really closely. Let me try and explain what this is showing. As the public's verdict about our economic managers gets worse, as we have less faith, the economy is well managed, consumer sentiment falls and it falls even further below what you would expect based on our economic numbers like inflation and unemployment. Every dot here is one month and I've got every month all the way back to 1978. And what I'm showing you here is the movements in consumer sentiment that are not explained by inflation and unemployment, sort of, if you want to call it the puzzle.

10:55And the other variable I'm showing you is people's faith in our economic managers. And you can see a remarkably close relationship. In fact, a 10 % worsening in the public's verdict goes with about four and a half point reduction in consumer sentiment. And that's even after you account for the actual inflation and unemployment rate. That's a really, really big relationship. And it's far too precise, far too common, far too pervasive to brush off as random noise. Of course, it's statistically significant. Of course, that was the first thing I checked. Here's the thing I want you to notice. The months since the 2024 election land right at the extreme end of the same historical pattern.

11:37It's at the extreme end because we currently have a fairly high degree of distrust in our economic managers. But the data show that the decline in consumer sentiment is pretty much exactly what you would expect given the historical relationship. Now, we can try and figure out what's going on in the background, why people have lost faith in our economic managers. And Michigan asked people, you know, in their own words to just say, what are some of the economic news that you've heard? In 2025, the number of people voicing complaints about the government hit a record high. When you look at their answers, tariffs absolutely dominated their answers.

12:11And in 2026, some of the tariff mentions faded, but complaints about high prices and gasoline started to grow. So people are taking in pretty much everything and they're putting it all together. And when they do that, they're coming to a much darker view of our economic future. And I should say it looks like it's a darker view of our economic future at exactly the same time and exactly the same way they're coming to a darker view about the quality of our economic managers. Now, we still have to be careful here. Look, economists always have to say that. A pattern that looks obvious after the fact, it might just be a story we've invented once we already knew the ending.

12:46A more serious test is whether we could have seen all of this coming, this dramatic decline in consumer sentiment based on rising distrust of our economic managers. I reckon we could have. To make that case, let me explain what I did. I estimated, don't you love it when we talk about estimation? I estimated how consumer sentiment typically moves with inflation, unemployment, and fears about the quality of our economic management. So what I did is I took data only through to October 2024. So prior to the madness of the latest election and everything that subsequently happened. That means that my computer model gets to see the preceding 46 years, but it doesn't get to see the last couple of years.

13:26Through that preceding 46 years, it got to see high inflation, recessions, recoveries, Democratic presidents, Republican presidents, the whole lot. My computer model sees all of that. What it doesn't see is what happened after the election, the dramatic decline in consumer sentiment. Based on that history, I then made two forecasts. The first forecast, you could call it a naive one. It basically says, let the computer model know what happened to inflation and what happened to unemployment. And if you want to get fancy, I also did a version where I asked what happened to the stock market as well.

13:56Didn't make much of a difference. And I can use that naive model to say, given the state of our key economic statistics, what do you think consumer sentiment should have done? Well, between late 24 and this summer, inflation barely rose by less than a percentage point. Unemployment barely budged. And so you can immediately see whatever the computer model says, if the inputs barely move, the outputs barely move. So that's saying our fundamentals reckon there's no real reason why consumer sentiment should collapse. Look, that's actually just the puzzle. The economy-only forecast says sentiment should have fallen by about two points.

14:31Instead, it fell by 17 points. That's the puzzle we're trying to explain. But here's our solution. Americans' verdict on the quality of our economic management worsened dramatically by 45 points. If I feed that enormous shift into my computer model, which includes the relationship between sentiment, inflation, unemployment, and our trust in our economic managers, but based only on the data from before this election, my computer model says, even just based on the history of all of this, sentiment should have fallen by about 20 points. That actually fell by 17. In economics, we call that not a miss.

15:06We call that nailing your forecast. So let me go back. I want to just make sure you understand what I'm trying to say there. Before the election, history said that if we experienced a record deterioration in America's view of economic management, that should bring forth a very large deterioration in consumer sentiment. That's based all on pre-election data. Then after the election, it actually turned out Americans' view of our economic managers deteriorated sharply and consumer sentiment in fact followed suit exactly as expected. That's basically my whole story. It's a story that also gets the timing right too.

15:40Sentiment plunged in early 25, partly recovered in the middle of that year, and then it sunk again in spring of 2026. The forecast that includes Americans' fears about our economic managers follows exactly those moves. So what I've really given you here is a set of statistical facts. Sometimes the important part is interpretation. Here's mine. Folks at home, they're doing something pretty sensible. They're taking in policy announcements and tariff madness and prices rising and rising gasoline costs and the competence or incompetence that they see or don't see from those who make our economic policies.

16:16And then they're asking a pretty ordinary question. What does this mean for my job, my bills and my family over the next year? And that hypothesis that that's what they're doing, it actually fully fits the size of the decline. It fits the timing and it fits the specific survey questions that change the most.

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18:41Okay. I hope you see the story and I hope you find it at least interesting, possibly provocative, and maybe even convincing. But to be convincing, I've got to do the most annoying economist thing next. Sorry, not sorry. What I'm going to do is try to see if I can destroy this finding. Here's why we do this. A theory only earns your trust when it survives interrogation of serious alternatives. If another explanation were to fit the facts better, then we should drop mine and go with the better one. That's the game. So let's think of some other stories that might explain what's going on. The first is partisanship.

19:17So here I'm thinking about the partisanship of folks answering consumer sentiment surveys. And there's good evidence that Democrats like it when a Democrat's in the White House and Republicans seem to be more optimistic when a Republican's in the White House. Fair enough. That's fine. So why don't we look instead at independents? Because they're not cheering for either team in any of this. Since late 2024, since the election, the verdict of political independence on economic management worsened dramatically by about as much as the rest of the population. And so did their consumer sentiment. And if you'd in fact taken the historical relationship between those two based on data from before the election, then in fact, my story can predict the change in the consumer sentiment of independence almost perfectly.

20:04There's a smaller, but I think interesting and useful bit of corroboration from Republicans. There was a post-election surge in optimism. They were so excited. They had their guy in the White House. They had Congress. They had the Senate. If you're a Republican, you probably would have felt pretty optimistic that the right side was in charge. But over the past year, Republicans have soured quite dramatically on Trump's economic management, particularly through 2026. And their concerns about the quality of our economic management rose, probably rose a bit less than the rest of the population. And my story then says, yeah, that probably explains why their consumer sentiment also fell by a bit less.

20:39Basically, their declining trust in the president also explains why their sentiment numbers have fallen. Okay, here's another possible explanation. Maybe everyone's just in a foul mood. Well, the data rule that out because we've got a pretty interesting and I think useful pattern. Americans' verdict on our economic managers, it sharply improves our ability to understand what people think about, say, national business conditions next year or business conditions in five years. It helps explain their optimism or pessimism. Today, it's pessimism about their expected real incomes. But those same views do not explain, say, their expectations for interest rates or their views about buying a house.

21:16So it tells us that this variable is picking up something that's tightly connected to people's broad sense of where the economy is headed, but not that tightly connected to specific judgments about specific markets where you think their own facts might matter more. Okay, one last technical detail. I know I'm trying your patience, but dotting your I's and crossing your T's is so important. My colleagues at the University of Michigan who run this survey, they changed the survey in 2024. They moved from calling people on the phone to asking them online. You can probably figure out why no one answers the phone anymore.

21:49And it turns out when you ask people online, they tend to be a little bit more pessimistic. So in all of the analysis I've shown you, we can adjust for that measured difference. But more importantly, remember what I'm trying to do is explain this large decline in consumer sentiment from just before the election to just about now. Well, both of those periods, the University of Michigan was using online surveys. The switch in methods happened earlier. And so therefore, the switch in methods can't explain why consumer sentiment fell so dramatically also at the same moment when distrust of our economic managers rose dramatically.

22:24Okay, look, I know you didn't subscribe to Platypus Economics for a riveting segment on telephone versus web survey methodology. Or maybe it did, but here we are. Let's put that aside. Let's come back and try to see the big picture. There is a lot going on in our economy. Prices are still way above where they were before the pandemic. Borrowing costs are high. And I think those forces might explain a somewhat different puzzle, which is why consumer sentiment has been weak since 2020. And it's been weak under both a Democratic and a Republican president. My claim is narrower, but I think no less interesting.

22:58Americans' verdict on economic management explains a huge chunk of the very recent fall over the past year and a half in consumer sentiment. But I'm not sure that's the whole story. And so if you've got another theory, if you can think about something in people's lives that these data are missing, I want you to leave it in the comments. I mean it. Give me your best alternative. I'm going to dig into it. I'm going to run the numbers and I'll report back. Okay, so where does this all leave us? It leaves us with a motive, a method, and a suspect caught at the scene, plus a hint that we have to add something to the way economists usually talk about the drivers of the business cycle.

23:35Economics textbooks, they teach us a lot about monetary policy and fiscal policy, taxes, spending, interest rates, inflation, unemployment, the tools that governments use to shape economic life. But those tools are only part of the story. There's also another part, whether people think that the people pulling those levers know what they're doing. And the argument that I've made today is that might explain to a very large extent, the pervasive pessimism among the American public right now. And I think that might point to a bigger lesson, a meta lesson, if you will, about the value of surveys. Our standard economic statistics, they measure specific chunks of life, the unemployment rate, the inflation rate, wages, stock prices.

24:19These qualitative surveys, like the ones my colleagues run, they ask households, folks like you or me, to put those pieces together. You know, think about the news that people hear, the prices you pay, the risks you feel, and the future that you think you're walking into. Look, all of that, that's information. And it's information that economists need to take seriously. Sometimes the economy isn't just the paycheck you got last month. It's the confidence you have in the people making decisions. And right now, I reckon it's the lack of confidence in our economic leaders that explains why consumer sentiment is so, so low.

24:58That's it for today's show. And I really hate to leave on a note of pessimism. So let's end with some optimism. If you liked what you heard, if you feel that you understand your world a little bit better, or even if you just learned something new, then, you know, I'm glad you're here. Good opportunity then to subscribe to Platypus Economics on YouTube, on Substack, on social media, and you can also download the show wherever you get your podcasts. Stay curious.

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