Americans aren’t worried about the government shutdown. But they remain unnerved about the cost of living and weak hiring

Consumer sentiment, as measured by the University of Michigan, dropped to a preliminary 55 in October, marking one of its lowest levels since 1952 due to persistent concerns over the cost of living and job prospects. Despite this historically weak sentiment, consumer spending has remained resilient, with retail sales increasing for the third consecutive month in August, suggesting a notable disconnect between consumer mood and actual economic activity. While the federal government shutdown has suspended key economic data releases, alternative sources indicate a continued slowing in the labor market, which economists view as the primary driver of future spending, even as unemployment remains relatively low.

Analysis

Consumer sentiment, as measured by the University of Michigan, declined to a preliminary 55 in October, marking one of its lowest levels since 1952. This deterioration is primarily driven by persistent concerns over the high cost of living and weakening job prospects, with consumers expressing little expectation for improvement. The ongoing federal government shutdown, now in its tenth day, has not yet significantly impacted consumer perceptions of the economy, despite over a million federal workers being affected.

Despite this historically weak sentiment, consumer spending has demonstrated resilience, with retail sales increasing 0.6% in August for the third consecutive month. This highlights a notable disconnect between consumer mood and actual economic activity, a dynamic that has persisted even during periods of record-low sentiment. Economists attribute this continued spending largely to the labor market's health, which, while slowing, remains "fairly solid" with relatively low unemployment.

The federal government shutdown has suspended the release of crucial economic statistics, including the monthly jobs report scheduled for October 3. However, alternative data from private companies and Federal Reserve regional banks indicate a continued slowing in the labor market last month. This slowing, coupled with persistent cost-of-living and high interest rate concerns, contributes to the tough job market perception, as noted by Oren Klachkin of Nationwide.

Key Decisions for Investors

• Investors should closely monitor actual consumer spending data, such as retail sales, rather than relying solely on sentiment indicators, given the persistent disconnect observed.
• Focus on alternative labor market indicators from private sources and regional Fed banks for insights into consumer spending capacity, especially while official government data remains suspended.
• Be aware that while the current government shutdown has not yet impacted consumer views, its prolonged duration could introduce significant macroeconomic risks and further data uncertainty.