Consumer sentiment is back to near-record lows. But Americans are still spending. Here’s why

US consumer sentiment has fallen to a near-historic low of 55.1, reflecting widespread concerns over persistent inflation and a potentially weakening labor market, further impacted by recent tariff announcements. However, this pessimism contrasts with robust actual consumer spending, which rose 0.6% in August, driven predominantly by higher-income households. This segment benefits from low unemployment, rising nominal wages, and near-record asset valuations, suggesting a continued divergence between overall sentiment and actual economic activity, particularly among affluent consumers.

Analysis

A significant divergence is emerging between U.S. consumer sentiment and actual economic activity. The University of Michigan's sentiment index has plummeted to 55.1, a near-historic low driven by persistent inflation concerns—with 44% of consumers citing eroded personal finances—and anxiety over a slowing labor market, a situation potentially aggravated by new tariffs. Despite this pronounced pessimism, aggregate consumer spending remains robust, with personal consumption expenditures rising 0.6% in August (0.4% inflation-adjusted). This disconnect is primarily explained by a bifurcated consumer base. Higher-income households, who account for the majority of spending, are sustaining their consumption patterns, buoyed by a low unemployment rate of 4.3%, rising nominal wages, and a wealth effect from near-record equity markets. This is corroborated by survey data showing sentiment held steady for consumers with stock holdings while declining for others. The Federal Reserve's recent rate cut, aimed at preempting a weaker labor market, further supports asset valuations, reinforcing the spending power of this affluent demographic and suggesting that headline sentiment figures are currently an unreliable predictor of overall economic momentum.

Key Decisions for Investors

• Investors should be cautious about using aggregate consumer sentiment as a leading indicator for shorting consumer discretionary stocks; instead, focus on companies that cater to high-income consumers who are demonstrating resilience due to strong asset valuations and stable employment.
• Monitor leading labor market indicators, such as weekly jobless claims and job openings, more closely than the headline unemployment rate, as a material deterioration in these metrics is the primary risk that could bridge the gap between negative sentiment and strong spending.
• Given the Federal Reserve's dovish pivot to support the labor market, investors might consider maintaining exposure to equities, as this policy stance provides a tailwind for asset prices, which in turn fuels the wealth effect driving consumption among the affluent.