Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Consumer Sentiment Paradox Markets Are Misreading
Transcript
- Lucas: Consumer sentiment hit a record low in May. That's the headline from last week. But the S&P 500 is at seventy-five-oh-five, small caps are up six percent in five days, and the jobs market is still adding payrolls. So what is the market seeing that consumers aren't? Luna: It's a weird moment. The University of Michigan survey — that's the one that hit the low — is supposed to capture how people feel about their own finances and the economy. And people feel terrible. But they're still spending. Lucas: Exactly. The headline number was the lowest since the survey started in the late 1940s. Lower than the 2008 financial crisis, lower than the pandemic. And the driving force is inflation — specifically the Iran war pushing up energy prices. But when you look at the hard data, core CPI is running about two point five percent annualised, the unemployment rate is four point three, and initial jobless claims just dropped to two hundred and nine thousand. That's a tight labor market. Luna: So the disconnect is real. But is it actually a disconnect? Maybe the sentiment numbers are picking up something the GDP data isn't. Lucas: That's the question. Real GDP growth annualised is exactly two percent. That's not a recession number, but it's not booming either. And the ten-year breakeven inflation rate is at two point four percent — basically in line with where we've been. So markets look at that and say, 'Okay, the economy is growing, inflation is sticky but not accelerating, the Fed is probably on hold.' But consumers look at gas prices and grocery bills and say, 'I am worse off than I was a year ago.' Luna: And the sentiment survey actually breaks down by political affiliation, which is interesting. The drop is sharpest among independents and Republicans, likely tied to the war and the administration's handling. But the overall trend has been declining for months across the board. Lucas: Right. The Michigan survey's current conditions index — which tracks whether it's a good time to buy big-ticket items like cars and houses — is also down. But here's the thing: retail sales have not collapsed. People are still buying cars, still traveling. They're just complaining about it. Luna: Complaining with their wallets open. So does that mean the sentiment numbers are noise? Or is it a leading indicator that spending will eventually crack? Lucas: Historically, sentiment is not a great predictor of consumer spending. The correlation is weaker than most people think. What matters more is actual income and wealth. And right now, the labor market is generating enough income to keep spending afloat. Average hourly earnings are up to thirty-seven dollars and forty cents an hour. That's about a four percent year-over-year increase. So wages are keeping pace with inflation for many workers. Luna: But not everyone. The JOLTS data from March showed job openings fell to six point eight six six million. That's down from six point nine two two million. The labor market is cooling, even if it's not cold. Lucas: Cooling from a very hot level. And that's actually what the market likes right now — a 'Goldilocks' scenario where the economy slows enough to keep the Fed from hiking, but not so much that earnings collapse. The two-year yield is at three point five eight percent, up slightly on the week, but the ten-year is at four point five, down one and a half percent in five days. That's the bond market saying, 'We don't think the Fed needs to do much more.' Luna: So the bond market is betting on a soft landing, even as consumers signal recession. Which side is right? Lucas: If I had to guess, I'd say the bond market has a better track record than consumer sentiment surveys. But the risk is that sentiment becomes a self-fulfilling prophecy. If enough people believe the economy is bad, they eventually change their behavior. We haven't seen that yet, but the Iran situation is the wildcard. If energy prices stay elevated, it squeezes disposable income further. Luna: And there's a political dimension too. The administration is under pressure to do something about inflation. But the Fed's hands are tied — they can't fight a supply shock with interest rates. Higher rates won't drill more oil or end a war. Lucas: That's the macro bind. The Fed's effective rate is three point six four percent, and they've been on hold since April. The market doesn't expect a move in either direction for months. But if inflation expectations start to drift higher — and the breakeven at two point four is already above the Fed's target — then the narrative could shift quickly. Luna: Speaking of narratives, we've been talking about this disconnect between sentiment and data. And honestly, that's the kind of thing that makes this show interesting to produce. We get to dig into why the numbers don't tell the whole story. Lucas: Yeah, and we love that we can do that without ads or sponsors. It keeps the conversations focused on what actually matters. If you find yourself walking through the economy with us and something clicks — or even if you just enjoy the no-frills approach — you can support the show at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. It's a simple way to keep this ad-free and independent. Luna: Absolutely. Every bit helps, and it means we can keep doing deep dives like this without worrying about pleasing advertisers. So thank you to anyone who does. Lucas: Alright, back to the data. Let's talk about what the small cap surge tells us about the sentiment gap. Luna: Because the Russell 2000 is up over six percent in five days, which is more than double the S&P's gain. That's a big move. Lucas: It is. And it suggests that the market is rotating away from the mega-cap tech names that dominated last year and into more domestically oriented, cyclical companies. Small caps are more sensitive to US economic growth, so if investors are piling in, they're betting the US economy holds up. Luna: But if consumer sentiment is at a record low, why would they make that bet? Lucas: Because the sentiment data is backward-looking in a way. It reflects the shock of higher gas prices over the past few months. But the market is forward-looking. And what the market sees is that the labor market is still adding jobs, wage growth is positive, and the Fed is done hiking. That's a decent backdrop for small caps, which tend to benefit from a stable interest rate environment. Luna: So the market is essentially saying, 'We trust the hard data over the survey data.' Lucas: For now. But if the sentiment numbers persist or worsen, and if that starts to show up in spending, then the market will have to reassess. The key thing to watch is the jobs report next week. If we see a miss, then the disconnect closes really fast. Luna: And if we see another solid number, then the narrative stays: consumers are grumpy but employed. Lucas: Exactly. Grumpy but employed. That might be the tagline for the 2026 economy.