Consumer Sentiment Isn't Politics, but Politics Is Reshaping It

A time of disruption is a time when expectations can play an outsized role in shaping the economy’s path. Now could be one of those times. Gasoline prices are almost 50% higher than in late February. How people react depends primarily on the building blocks of their finances—income, savings, and access to credit—and their spending needs. Their expectations about the future can matter for decisions, too.

People who expect gasoline prices to fall again soon and generally feel good about the year ahead might use savings to cover the temporary extra cost. People who expect higher gas prices to drag on and spill over into other prices, persistently reducing their disposable income, or expect a sluggish economy, might pull back on their spending. They might also try to find higher wages to offset higher inflation, pushing even more costs into the economy. Monitoring sentiment and expectations now can offer insights into what consumer spending, inflation, and the labor market might look like later this year.

It’s not surprising that there’s a lot of interest from policymakers and forecasters in what measures of consumer sentiment and inflation expectations are telling us today. With recent headlines like “consumer sentiment hits fresh record low in May” and “inflation expectations are rising,” there’s real concern. But there’s also a debate about whether some of the longstanding measures, like those from the Michigan Survey, no longer tell us anything about the views that shape people's economic decisions. That's the claim worth taking seriously, because if it's right, the record-low sentiment readings and the pickup in long-run inflation expectations are noise; and if it's wrong, they're a warning.

Is it politics or is it reality?

Kevin Hassett, a top economic advisor at the White House, recently brushed off downbeat consumer sentiment as pure politics:

They call it consumer sentiment, but I don’t think these words mean what they think they mean anymore. We looked at the political affiliation of the people who are responding. At the peak of Biden’s stagflation, with inflation running out of control, Democrats in the survey had a sentiment index way above 100. Now they are at 30 something. And then Republicans have stayed relatively steady throughout. But we find basically we find that the consumer sentiment indicator at the University of Michigan is just a political survey. In fact, the correlation between what Independents say and Democrats say is like 0.8 or 0.9. It’s almost perfectly correlated. They have somehow devised a political survey that tells us how Democrats are feeling about things.

Paul Krugman pushed back, using another survey to argue that MAGA Republicans, not Democrats, are the outlier on sentiment:

The great majority of Americans — essentially everyone who isn’t a total Trump loyalist — believes that the economy is getting worse. And there are good reasons for that negativity. Inflation is way up as a result of Trump’s tariffs and his Iran war. Because of this surge in prices, real personal income has declined sharply.

Krugman captures the fundamentals driving sentiment this year well. Hassett undercuts his own ‘Democrats-only’ argument by mischaracterizing the recent swings in sentiment, as I will show below. Widening the lens on the Michigan Survey—a longer history, a closer look at political affiliation—I find that pessimism has deepened regardless of party, but the partisan divide has grown so large, and the survey itself has changed in ways I’ll get to, that the numbers have become harder to interpret.

The Michigan Survey is about economics, not politics.

The Michigan Survey has always sought to capture consumer attitudes that might shape economic behavior. The survey was launched after World War II to gauge how people might respond to the economy’s reopening and the large holdings of government war bonds. The intent is clear in the sentiment index questions themselves:

1. We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?

2. Now looking ahead—do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?

3. Now turning to business conditions in the country as a whole—do you think that during the next twelve months we'll have good times financially, or bad times, or what?

4. Looking ahead, which would you say is more likely—that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?

5. About the big things people buy for their homes—such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?

These questions are a mix of family-specific and economy-wide assessments, as well as current and expected conditions. They have proved valuable in studying changes in the economy. For example, Bryson and Blanchflower have shown that the index built from these questions has been a reliable predictor of recessions in the US, and similar measures are also informative in other countries. In my time as a consumption forecaster at the Fed, I found them a useful addition to the toolkit, particularly around turning points in the economy.

While the questions are economic in nature, it’s not hard to see how a person’s political views might affect the answers. Political affiliation, when asked, is placed at the end of the survey to avoid priming people to think about their politics. Even without prompting, the political divide in consumer sentiment is striking.

Having your party in the White House has a large effect on sentiment, but people are more downbeat regardless.

The partisan divide in sentiment is huge and clearly tied to whether your party is in the White House. The average sentiment among Republicans (red line below) in the past three months was 55 index points above that of Democrats (blue line). To put that in context, the sentiment gap between households in the top third of income and those in the bottom third is only 13 points. No other demographic grouping in the survey comes anywhere close to the political divide. Also, the re-ordering in sentiment—among both Republicans and Democrats—when the President’s party changes is clear. That’s consistent with a well-documented phenomenon in which people tend to overestimate the President’s effect on the economy. Contrary to Hassett, Republicans are no more stable in their views across administrations than Democrats.

The strong political cycle in sentiment does not mean that the Michigan survey is pure politics and divorced from consumer behavior. Economic drivers are still clearly at play, too. Looking at the sentiment of Republicans and Democrats separately, it is clear that both have declined since the start of the year as gasoline prices have risen sharply. Other major economic events, such as the inflation surge in 2021-22 and the onset of the pandemic in early 2020, show up as a decline in sentiment regardless of political affiliation. Contrary to Hassett, sentiment among Democrats fell well below 100 when inflation surged in 2021-2022. All of those fit the standard economic narratives of consumer sentiment.

The downbeat mood of people in recent years, sometimes referred to as a vibecession, is also apparent. The average sentiment of Republicans is currently below their pandemic low in 2020. Among Democrats, the downshift relative to 2020 is more pronounced, but sentiment among Republicans is noticeably lower than during most of Trump’s first term. Writing off the low sentiment readings now as 'Democrats are unhappy with Trump' is throwing away a lot of information.

The political divide has more than doubled since the Great Recession, making sentiment harder to compare.

Prior to 2017, the Michigan Survey only asked about political affiliation sporadically, usually around elections. The earlier estimates are somewhat noisier, but the widening partisan gap is stark. In the spring of 2008, the gap was less than 20 index points, compared with 55 points in 2026. Under Obama, the partisan gap widened somewhat, but it was not until the Trump administration that it almost doubled.

The widening political divide raises hard questions. Good decision-making depends on having good information about the world. One way to interpret these very different sentiment readings is that the two sides are drawing on genuinely different information — living in alternate universes. (Nothing in the survey primes people toward party loyalty, so the gap isn't a survey artifact.) Another is that Trump's communication style has elevated the "the President runs the economy" mindset. I am well aware of the tendency to over-emphasize the President, and I have to actively guard against it as I sift through the latest barrage of posts on Truth Social.

The widening divide also complicates comparisons over many years, such as how to think about an all-time low in the series now. In 2008 and 2009, during the Great Recession, consumer sentiment was very low. The overall index ranged from the low 50s to the low 60s. It was low for both Republicans and Democrats. Now the overall index is in the 40s, but that reflects Republicans with much higher sentiment and Democrats with much lower sentiment than the average. If the economic reality were the worst of all time, how could partisanship have such a strong effect?

I also worry that economic views tied to politics, rather than economic reality, could lead to bad decisions and frustration for people. Consumer sentiment may be getting harder to use in forecasts of consumer spending, but it may be forecasting something even more important about society.

The usual workarounds don't fix it.

Given how large the partisan divides are, there is no easy fix. One common go-to is to examine the sentiment of Independents. It's true that Independents' sentiment usually tracks between the average sentiment of Democrats and Republicans, but there’s a partisan divide there, too. The Michigan Survey asks independents if they are “closer to Republicans” or “closer to Democrats.” The partisan gap exists among Independents by their leanings, though it is somewhat narrower than among those who identify with a party.

The stark differences even among Independents could be consistent with differing information environments rather than strong ties to the party. The sentiment of Independents who say they are closer to neither party has drifted downward since the pandemic, so blaming the survey’s pessimism on Democrats does not hold up.

There's a more concrete problem related to such large partisan gaps. In the summer of 2024, the Michigan Survey transitioned from a phone to an internet survey to reduce costs. The transition coincided with a drop in the share of Republican respondents and an increase in the share of Democratic respondents. If the shares had remained at their level in early 2024, the current overall sentiment index would be 7 points higher. That would be enough to overturn the “all-time low” label, though it would still be downbeat. Michigan carefully constructs its survey to be representative of the U.S. adult population, but as with most surveys, it does not include political affiliation in its sampling frame. Small shifts in politics can result in big shifts in the index.

Avoiding the Michigan Survey is not the answer, and it would be wrong to assume it’s the only survey with these partisan divides. The political lens is almost certainly pervasive across sentiment surveys, but most do not collect information about political affiliation. The fact that Michigan collects political affiliations can be an advantage. Looking for declines in sentiment or increases in inflation expectations within political groups may be the best way to separate genuine economic shifts from partisan noise.

In closing.

For decades, the Michigan Survey has helped shed light on consumers’ views about the economy, and it still does — pessimism has deepened across the board, not just among Democrats. But the partisan divide has grown wide, and the survey has shifted in ways subtle enough to move the headlines. The overall numbers—whether sentiment or inflation expectations—need to be handled with care. The signal is still there; you just have to look within the politics to find it, not explain it away.