It's not just vibes. Americans' perception of the economy has completely changed.

There's a question journalists, economists and President Joe Biden's campaign have been puzzling over for months: Why, when every traditional indicator is positive, are Americans so displeased with the economy?

According to the most recent jobs report, job growth is steady, unemployment remains low and wages are rising. The gross domestic product, a common measure of the health of the economy, has been growing since the second quarter of 2020. Even inflation, which in 2022 reached the highest levels Americans had seen in decades, has finally been cooling.

And yet, consumer sentiment is pessimistic. In June 2022, the University of Michigan Consumer Sentiment Index reached the lowest level ever recorded since tracking began in 1966 — lower even than during the Great Recession of 2008. No matter how you slice it, there's a gap between how the economy is doing and how Americans feel about it.

Or is there? We wanted to understand the factors at play in Americans' perception of the economy and why, despite strong fundamentals, people still aren't feeling good about it. And we wondered if maybe it's not that people are wrong about how the economy is doing, but that they simply care about different issues in the wake of the upheaval following the COVID-19 pandemic.

To piece this together, we downloaded a collection of economic indicators related to people's experiences of the economy from the St. Louis Federal Reserve — specifically, indicators relating to inflation, interest rates, work and wages, housing, and basic household finances. We then fitted a linear regression model using those indicators to look at how they were related to the University of Michigan Consumer Sentiment Index from 1987 to 2019 (basically, the "Before Times").*

This model tracks the Consumer Sentiment Index over that time period pretty closely.** Consumer sentiment as a trendline can be a bit spiky, as big news or economic shocks (such as the collapse of the housing market in 2008) can have dramatic effects that fade fairly quickly as the economy stabilizes. But other than these spikes, our model is fairly consistent at tracking the trends over the 32-year period preceding the pandemic.

Applying the same pre-pandemic model to consumer sentiment during and after the pandemic, however, simply does not work. The indicators that correlated with people's feelings about the economy before 2020 no longer seem to matter in the same way. As with so many areas of American life, the pandemic has changed virtually everything about how people think about the economy and the issues that concern them.

Before the pandemic, a number of variables were statistically significant indicators for consumer sentiment in our model; in particular, the most salient variables appear to be vehicle sales, gas prices, median household income, the federal funds effective rate, personal savings and household expenditures (excluding food and energy). And some of these indicators have seen dramatic changes over the past four years, likely contributing to the disconnect between the positive economic news and Americans' continued economic pessimism.***

Personal savings rate

Prior to the pandemic, our model shows consumers felt better about the economy when the personal savings rate, a measure of how much money households are able to save rather than spend each month, was higher. This makes sense: People feel better when they have money in the bank and are able to save for important purchases like cars and houses.

During the pandemic, the personal savings rate soared. In April 2020, the metric was nearly double its previous high, recorded in May 1975. There are many reasons consumers were able to save in 2020, of course; people weren't able to spend their money the way they normally would have while businesses were closed and families were encouraged to stay home. Moreover, the pandemic response from the federal government sent a lot of extra money to families across the country. The CARES Act in March 2020, the Coronavirus Response and Relief Act in December 2020 and the American Rescue Plan Act in March 2021 all included direct payments to households, as well as other things that put money in people's pockets, like an expanded child tax credit and increased unemployment payments.

All this taken together meant Americans were flush with cash but had nowhere to spend it. So despite the fact that the savings rate went way up, consumers still weren't feeling positively about the economy — contrary to the relationship between these two variables we saw in the decades before the pandemic.

Fast forward to 2024, and the personal savings rate has dropped to one of its lowest levels ever (the only time the savings rate was lower was in the years surrounding the Great Recession). This may be due in part to high inflation and increased costs for important household purchases, like cars and homes. Even so, it's too early to tell if the previous correlation between personal savings and consumer sentiment will resume; while both measures are currently relatively low, there isn't enough data to determine if the correlation is back to its pre-pandemic levels.

Inflation

Another big piece of the puzzle is inflation. Before the pandemic, changes in the inflation rate weren't statistically significant in our model (though we do see a negative relationship between consumer sentiment and personal consumption expenditures).**** But during and after the pandemic, Americans saw some of the highest rates of inflation the country has had in decades, and in a very short period of time. These sudden spikes naturally shocked many people who had been blissfully enjoying slow, steady price growth their entire adult lives. And it has taken a while for that shock to wear off, even as inflation has crept closer to typical levels.

"You have a lot of people today that really don't have any experience with any sort of substantial inflation, and so now they're seeing it for the first time," said Ryan Cummings, a former staff economist at the White House and visiting student researcher at Stanford University. "People were used to seeing almost zero inflation."

Cummings and his research advisor and former White House colleague Neale Mahoney used a regression model to show that the slow recovery of consumer sentiment after dramatic inflation spikes was something we'd seen before — and it was measurable. They found that if inflation spikes to 12 percent — or 10 percentage points above the Federal Reserve's 2 percent target — the Consumer Sentiment Index drops by about 35 points. And that effect lingers, with a decay rate of about 50 percent per year. But since Americans are currently reeling from the aftershocks of not only this year's 3.2 percent year-over-year inflation but also last year's 7.8 percent inflation and 2022's 6.2 percent inflation, it creates a cumulative effect on consumer sentiment.

That said, Cummings noted this isn't a perfect explanation; accumulation accounts for only part of the gap between consumer sentiment and economic indicators, and their model was trained on only two real-world events (the inflation of the early 1980s and the post-pandemic shock). But the numbers align with our intuitive sense of how consumers process suddenly having their grocery store bill jump, as well as the findings from our model. In simple terms: Even if inflation is getting better, Americans aren't done being ticked off that it was bad to begin with.

Housing

The cost of housing, whether buying or renting, is one of the biggest items on most household budgets. But surprisingly, our pre-pandemic model didn't find a notable relationship between housing prices and consumer sentiment.***** We also looked at the direct correlation between housing prices and consumer sentiment and didn't see a meaningful relationship there either. However, in our post-pandemic data, when we examined how correlated consumer sentiment was with each indicator we considered, consumer sentiment and median housing prices had the strongest correlation of all****** (a negative one, meaning higher prices were associated with lower consumer sentiment).

Consumers' homes are often one of their most valuable assets, so a steady rise in housing prices can lead to an increase in a household's wealth over time. But during the pandemic, low interest rates, high savings rates and changes in working patterns — namely, many workers' newfound ability to work from home — helped overheat the homebuying market, and buyers ran headlong into an enduring supply shortage. There simply weren't enough houses to buy, which drove up the costs of the ones that were for sale.

The sticker price isn't the only thing making houses difficult to afford. After inflation began to soar, the Federal Reserve Board raised interest rates and has kept them high. Average mortgage rates for a 30-year fixed-rate mortgage are around 7 percent today. That means that lower- and middle-income families struggle to qualify for mortgages because the interest rates would make their monthly payments especially high. "Trying to buy a median-price home at the prevailing mortgage rates, it is twice as high a monthly mortgage payment now compared to pre-COVID," said Lawrence Yun, chief economist at the National Association of Realtors.

That's true even if a family has been able to save enough for a down payment, already a difficult task when rents remain high as well. Fewer people are able to cover their current housing costs while saving enough to make a down payment. Low-income households are still the most likely to be burdened with high rents, but they're not the only ones affected anymore. High rents have also begun to affect those at middle-income levels as well. "Households earning $30,000 to $45,000 per year, the rates of cost burden have been rising faster than for lower-income or higher-income households," says Daniel McCue, a senior research associate at the Harvard Joint Center for Housing Studies. "We've seen more and more moderate- and middle-income households feeling the burden."

In short, there was already a housing affordability crisis before the pandemic. Now it's worse, locking a wider array of people, at higher and higher income levels, out of the home-buying market. "The critical shortage of housing in the U.S. market is really having lasting effects on housing overall," said Matthew Walsh, assistant director and economist at Moody's Analytics. A big component of that shortage is also the fact that, after the Great Recession and housing crisis earlier this century, very few starter homes or low-cost units were built, making things even worse for first-time homebuyers, he said.

People who are renting but want to buy are stuck. People who live in starter homes and want to move to bigger homes are stuck. The conditions have frustrated a fundamental element of the American dream. "Most Americans view their life cycle as: They go to college … find a good job, then after having a job for several years, trying to buy a house," said Yun. "That kind of normal sequence of improving their life has been now cut off, because even if one has a good job, even if one has a good credit score, it's very difficult to become homeowners. So I think this shock factor is greatly influencing people's sentiment about the broader economy."

Vehicle sales

One other factor we wanted to investigate was car sales. In our pre-pandemic model, total vehicle sales had a strong positive relationship with consumer sentiment: If people were buying cars, you could pretty reasonably bet that they felt good about the economy. This feels intuitive — who buys a car if they think the economy is in the toilet? But during and after the pandemic, a lot seemed to change in the industry.

The tumult that the pandemic created in the auto market has been well documented — between supply chain issues, factory shutdowns, households with excess cash and an entire population's sudden desire to be able to travel without sharing air space with hundreds of other passengers, the pandemic really shook things up, and the auto industry is only now starting to revert back to something like normal.

One possible explanation for a shifting relationship between consumers and their cars may be something we've already covered: inflation. The positive relationship between car sales and consumer sentiment that our model found before the pandemic has been well documented in the automotive industry, according to Mark Schirmer, the director of corporate communications for Cox Automotive, the international automotive marketing and research conglomerate that owns AutoTrader and Kelley's Blue Book.

"Consumer sentiment is really important for car buying in that, if you don't feel positive about your finances, the economy overall, you're not likely to be making big purchases. Remember, an automobile typically is like the second most expensive thing you'll ever buy, beyond your house," Schirmer said.

But since 2020, there hasn't been a statistical relationship between total vehicle sales and consumer sentiment — probably a result of the complexities and shifts in the economy in the post-pandemic world (which would again make it difficult for the model to parse signal from noise). Schirmer said it may have to do with the high interest rates and prices car buyers are facing. The majority of car buyers finance that purchase, and the average new auto loan interest rate is currently 9.7 percent, while the average used auto loan rate is 14.1 percent, just below its all-time high, achieved in February.

Cox Automotive also tracks vehicle affordability by calculating the estimated number of weeks' worth of median income needed to purchase the average new vehicle, and while that number has improved over the last two years, it remains high compared to pre-pandemic levels. In April, the most recent month with data, it took 37.7 weeks of median income to purchase a car, compared with fewer than 35 weeks at the end of 2019.

"Right before the pandemic, the typical average transaction price was around $38,000 for a new car. By 2023, it was $48,000," Schirmer said. This could all be contributing to the break in the relationship between car sales and sentiment, he noted. Basically, people might be buying cars, but they aren't necessarily happy about it.

* * *

Inspired by our model of economic indicators and sentiment from 1987 to 2019, we tried to train a similar linear regression model on the same data from 2021 to 2024 to more directly compare how things changed after the pandemic. While we were able to get a pretty good fit for this post-pandemic model,******* something interesting happened: Not a single variable showed up as a statistically significant predictor of consumer sentiment.

This suggests there's something much more complicated going on behind the scenes: Interactions between these variables are probably driving the prediction, and there's too much noise in this small post-pandemic data set for the model to disentangle it. That makes sense — the economy is a complicated organism, things are connected to each other in complex ways and the pandemic was a once-in-a-century shakeup to the status quo. It's a notable shift from the Before Times, when we had a relatively clear sense of which variables were related to consumers' feelings and in what kinds of ways.

Changes in the kinds of purchases we've discussed — homes, cars and everyday items like groceries — have fundamentally shifted the way Americans view how affordable their lives are and how they measure their quality of life. And even as real wages catch up to inflation and the job market and stock market remain strong, there are still genuine challenges facing consumers that aren't isolated to just one or two indicators. Even though some indicators may be improving, Americans are simply weighing the factors differently than they used to, and that gives folks more than enough reason to have the economic blues.

Footnotes

*The model we're using here is different from the types of models economists use to understand and predict consumer sentiment. Our goal with this model is to explore and understand certain factors related to household finances and how they've correlated to consumer sentiment in the past, rather than to try to anticipate future sentiment or make predictions about the economy. We've limited the scope of our variable set to include only those related to household finances so that we can analyze changes in how those measures relate to overall consumer sentiment. Moreover, we used a linear regression, rather than a more sophisticated modeling technique, so that we can focus on simple relationships between these variables and overall sentiment. We also excluded any highly correlated indicators from our regression.

**For the wonks out there, the adjusted R-squared is about 0.7.

***Because this analysis is exploratory and we kept the model relatively simple to avoid overfitting, we didn't want to read too much into the strength or power of the observed relationships in our model, so we've opted to focus only on the direction of the modeled coefficients. In other words, does the indicator have a positive or a negative relationship with consumer sentiment, if all other indicators were held equal? We acknowledge that the relationship among the various indicators and with consumer sentiment are much more complex than observed in our linear regression.

****We didn't include the Consumer Price Index in our model because it was highly correlated with a few other indicators that we were interested in. (See the methodology for more details.) We did, however, include a measure of how much the CPI had changed in the last month and found no statistically significant relationship between that metric and overall consumer sentiment.

*****The lack of a statistically significant relationship between housing prices and pre-pandemic consumer sentiment in our model led us to wonder whether there might be a more complex relationship obscuring any more straightforward relationships. So we tried including an interaction (between median housing prices and new housing starts, or the number of new homes being built each month) in our model; basically, we checked whether the two variables were "working together" in a way that allowed us to observe a relationship with consumer sentiment. In this case, we saw a negative relationship between consumer sentiment and the interaction between median home prices and new housing starts. So there was likely a relationship between housing prices and consumer sentiment prior to the pandemic, but it was complicated. And again, because this analysis is exploratory, we don't want to put too much stock into the specifics of the interaction.

******With a Pearson correlation coefficient of -0.77.

*******The adjusted R-squared was 0.7, which was similar to our pre-pandemic model.

Methodology

To explore the relationship between consumer sentiment and underlying measures of household finances, we analyzed the relationship between the University of Michigan's Consumer Sentiment Index and 21 possible indicators. We began with a set of 20 indicators chosen from those available from the St. Louis Federal Reserve related to five main categories: inflation, interest rates, work and wages, household finances, and housing. Because the Consumer Sentiment Index is a monthly indicator, for less frequent indicators, such as those that publish quarterly or annually, we used the most recent available observation for each month. For indicators that are more frequent than monthly, we took the average of all values observed in each month. We also included a 21st indicator — monthly S&P 500 closing prices, obtained from Yahoo Finance. These indicators were then all normalized to have a mean of 0 and standard deviation of 1.

We then calculated the Pearson correlation coefficients among all 21 indicators from 1987 to 2019 to ensure that the indicators going into the model did not include any that were highly correlated with each other. We removed any indicators that had a Pearson correlation coefficient of over 0.85 with each other (regardless of the direction of their correlation), keeping one measure from each group of highly correlated indicators while also ensuring we had at least one indicator from each of the five main categories. The final set of indicators included in the model were the unemployment rate, federal funds effective rate, personal savings rate, real median household income, new housing units started, change (month-over-month difference) in Consumer Price Index, crude oil prices, personal consumption expenditures (excluding food and energy), real median weekly earnings, median home sales prices and total vehicle sales.

Once we had selected the final set of indicators, we trained a linear regression on a random subset of 50 percent of data from 1987 to 2019, with the Consumer Sentiment Index as the dependent variable. To assess whether the pre-pandemic-trained regression was able to predict consumer sentiment using post-pandemic data, we used the pre-pandemic model to predict consumer sentiment based on data from 2020 to 2024. We evaluated statistical significance using bootstrapped 95 percent confidence intervals with 1,000 repeated samples.

To further compare how consumer sentiment has changed from the pre-pandemic to post-pandemic data, we re-fitted the pre-pandemic model but trained it on post-pandemic data (i.e., used the same indicators), omitting data from 2020 due to the high level of volatility in the economy that year. In addition, we examined Pearson correlation coefficients between each indicator and consumer sentiment for both time periods.