There is another world, but it is in this one. — Paul Éluard
There is another world, but it is in this one.
The U.S. economy looks very different depending on where one stands. While the S&P 500 Index marked record highs in May, the University of Michigan Consumer Sentiment Index fell to 44.8, its all-time low. Equity markets reflect resilient corporate earnings, strong investor demand and continued confidence in the largest public companies. In contrast, sentiment data points to household stress, weaker purchasing power and persistent frustration with the rising cost of living. The divergence highlights one of the central tensions in today’s economy: Financial markets have recovered far more quickly than household confidence from the post-inflation economy.
That gap reflects how unevenly the recovery has been experienced. Record equity prices disproportionately benefit wealthier households because they own the largest share of stocks and other financial assets. Higher prices weigh more heavily on lower-income households, which tend to own fewer financial assets and allocate a larger share of income to essentials such as food, fuel, rent, insurance and utilities. The University of Michigan’s latest survey notes that “lower-income consumers and those without college degrees posted particularly strong sentiment declines.” The result is a bifurcated economic experience.
Inflation helps explain why sentiment has not followed the stock market higher. Investors tend to focus on the rate of inflation, Federal Reserve policy and corporate earnings. Households focus on the level of prices, meaning how much things cost after several years of price hikes. Food, gasoline, insurance, utilities, rent and household goods remain significantly more expensive than before the inflation shock. Recent geopolitical tensions, including the Iran war, have added pressure through higher energy prices. Gasoline prices, in particular, carry outsized weight because households see them often and feel them directly.
Tax refunds have provided some relief this year. Individual refunds have run ahead of the past several years on a cumulative year-to-date basis, giving households a temporary cash-flow buffer even as prices remain elevated. This helps explain why spending has held up better than sentiment would suggest.
Consumer sentiment now carries a political overlay, reflecting a broader polarization that has shaped many parts of American life in recent years. That caveat matters when comparing the Michigan sentiment survey with the Conference Board Consumer Confidence Index. University sentiment is built around questions that go directly to household finances, including whether consumers are better or worse off than a year earlier, whether they expect to be better or worse off a year ahead and whether now is a good or bad time to buy major household items. Conference Board confidence places more emphasis on business conditions, employment conditions and labor-market expectations. The current weakness in the sentiment index should be interpreted with care, but it still lines up with an economy in which many households are absorbing inflation, high interest rates and affordability pressure.
The result is a K-shaped economy. Corporate earnings, asset prices and investor expectations have rebounded strongly, while many households continue to feel squeezed by the cost of living. The same economy can simultaneously produce record equity prices and historically weak consumer sentiment because gains and burdens are distributed unevenly across households. That divide remains one of the defining features of the post-inflation economy.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
