Economists and investors should pay less attention to consumers

It is angdp. idea so seemingly obvious as to need little elaboration: people’s feelings influence their behaviour. In the economic realm this truism helps explain why surveys of consumer sentiment garner attention. They are seen as predictive of spending trends and, by extension, the state of the economy. But pause for a moment to examine how exactly sentiment affects the economy, and the causal chain starts to look sketchier. At the current juncture, when many think America is on the brink of recession, this oft-cited but fallible leading indicator merits closer inspection.Understanding consumer spending is a holy grail for forecasters, since it accounts for about two-thirds of American Get it right, and the rest of the economy becomes much clearer. But the past couple of years have not been kind to those who focus on sentiment as a guide to future spending. The most closely watched index of consumer sentiment, published monthly by the University of Michigan, plunged to its lowest reading in more than four decades in 2022, and yet consumer spending remained resilient, even after accounting for inflation. This year, by contrast, the Michigan gauge has gained ground, and yet other indicators, including bond yields and lending flows, are flashing warning signs.