Goldman Sachs argues poor consumer sentiment is increasingly about the state of the world, not just the economy

Overview

This macro note examines why consumer sentiment remains depressed despite relatively solid economic conditions. Goldman Sachs concludes that the disconnect cannot be explained solely by the economy: broad pessimism about the state of the world and declining trust in institutions appear increasingly important.

Core views

Goldman Sachs begins with the unusual divergence between consumer sentiment and observed economic fundamentals. In the US, the average of the University of Michigan consumer-sentiment and Conference Board consumer-confidence measures stands well below the level implied by unemployment, headline inflation and the wealth-to-income ratio. The gap is especially pronounced in the US, but sentiment is also below model-predicted levels in almost all developed markets. This persists despite a healthy labor market, a booming stock market, solid consumer spending and GDP growth. The report identifies several established economic and political contributors. Across countries, larger peak year-on-year inflation rates during the pandemic are associated with weaker recent consumer sentiment, suggesting that the higher price level left by the inflation surge continues to weigh on households. Political biases also contributed to sharp sentiment shifts after recent elections that changed political leadership; Goldman Sachs notes that these effects were amplified in the US after the University of Michigan survey moved to online collection. US demographic evidence indicates that cost-of-living pressures matter but are not a complete explanation. Lower-income and lower-wealth households experienced larger declines and remain more downbeat, consistent with concerns about a K-shaped economy. Yet weakness is widespread: sentiment remains below 2019 levels for every group examined, including combinations of wealth, income, generation and social-media use, as well as political parties and homeowners versus renters. Gen X and Baby Boomers report weaker sentiment than Millennials and Gen Z, contrary to a narrative that younger households should be uniquely burdened by living costs and AI-related job-displacement concerns. Social-media users report higher sentiment than non-users even after controlling for age, which the report interprets as evidence that greater social engagement may outweigh potential negative effects of social media on sentiment. Goldman Sachs then considers whether sentiment has become a broader measure of dissatisfaction rather than an economic indicator. University of Chicago General Social Survey data show that general happiness fell sharply in 2020 and has not recovered. The decline is much larger than the deterioration in respondents' assessment of their own financial situations and is broad across socioeconomic groups. The report links this pattern to declining confidence in societal and government institutions: confidence has fallen for nearly all institutions since 2016, with the largest declines in medicine and science, the military, education and the Supreme Court. Using survey microdata, Goldman Sachs constructs an aggregate institutional-distrust measure covering 13 institutions and uses regressions to decompose the happiness gap. Relative to historical averages, declining institutional trust accounts for a disproportionate share of the recent fall in net happiness, while changing perceptions of personal finances have a much smaller effect. The report therefore concludes that weak reported economic sentiment likely reflects a more fundamental downbeat view of the world. Even if economic performance remains strong, sentiment may not recover in the foreseeable future and may become a less useful predictor of economic dynamics.

Analysis framework

The report compares observed sentiment with levels implied by macroeconomic fundamentals, examines cross-country relationships between pandemic inflation and sentiment, and segments US survey results by household and demographic characteristics. It then uses General Social Survey microdata to compare happiness with perceived finances and regressions to assess how institutional distrust contributes to the decline in happiness.

Methodology notes

• Other

  Model comparison of observed consumer sentiment with levels implied by macroeconomic fundamentals

  Goldman Sachs compares actual sentiment with estimates based on unemployment, inflation and the wealth-to-income ratio to quantify the unusual weakness in sentiment.

• Other

  Survey-microdata regression and decomposition of the happiness gap

  The report constructs an institutional-distrust proxy across 13 institutions and uses regression results to assess the contribution of distrust and perceived finances to lower happiness.

Key data

• US consumer sentimentWell below the level implied by unemployment, headline inflation and the wealth-to-income ratioBased on the average of University of Michigan consumer sentiment and Conference Board consumer confidence.
• Developed-market sentimentBelow model-predicted levels in almost all DMsThe gap is particularly pronounced in the US.
• Sentiment across US groupsBelow 2019 levels for all strata shownIncludes wealth, income, generation, social-media use, political affiliation, homeownership and renting status.
• Institutional distrust measure13 institutionsConstructed from General Social Survey microdata for the report's happiness-gap decomposition.

Impact & implications

The report suggests that consumer sentiment may remain depressed even if the economy continues to outperform. As a result, sentiment readings may be less reliable as standalone indicators of future economic dynamics because they increasingly capture broader social and institutional pessimism.