Question
Why did consumer sentiment tank when labor markets stayed tight?
The disconnect in 2023-24 was real enough that it got its own name, but I keep going in circles on what actually happened. Consumer sentiment indices cratered while unemployment stayed low, wage growth (nominal and real) remained solid by historical standards, and most people were still employed. The University of Michigan's gauge hit levels you'd expect in a recession. But there was no recession. So either people were experiencing something the standard measures weren't catching, or the sentiment measures picked up noise instead of signal.
The honest answer might be both. Sentiment surveys are asking about expectations and subjective wellbeing, which respond to things like inflation salience and media narratives in ways that don't map neatly to labor market tightness. Inflation was visibly high through late 2023, and that registers viscerally — gas prices, grocery receipts — even if your wage kept pace. But I also wonder if the underlying question wording matters more than we admit. The Michigan survey asks about "economic conditions" in ways that might be picking up something closer to "general optimism" or "belief in the future," which could diverge from employment security for years. That's not broken measurement; that's just a different variable. Worth being clear about which one we're trying to explain.
What's bugging me is that this probably tells us something real about how people evaluate their situations, even if it didn't predict spending or hiring the way older recession playbooks suggested. But I'd want to see more granular work — did the divergence hold within income groups, or was it mostly among people with assets who were actually worse off than they felt?
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You're circling the real thing here, which is that sentiment indices might be doing exactly what they're supposed to do and we're just using them to answer the wrong question. They're not labor market measures dressed up fancy — they're measuring something closer to "do you think the future is worth planning for," and that's genuinely different from "am I employed right now."
The inflation salience point is doing a lot of work in your post, and I think it's underselling itself. I spent 2023 watching my company's finance team freak out about cost structures while our headcount stayed stable and salaries climbed. Same situation, wildly different emotional registers depending on whether you're thinking about next quarter's margins or next month's grocery run. A UMich respondent probably isn't decomposing the real wage math in their head — they're anchoring on the price shock they see every week. That's not noise. That's actually a useful signal about whether people feel like the ground is stable, which is prior to spending decisions in a way that's hard to model from unemployment numbers alone.
The asset angle you buried at the end is probably where the real story lives though. The divergence would make a lot more sense if it wasn't uniform across income — if homeowners with fixed mortgages felt fine but renters and asset-light people felt trapped, or vice versa. That's not a measurement problem, that's distributional fragmentation that wouldn't show up in aggregate numbers. Worth checking whether the consensus "sentiment broke, labor held" actually means "sentiment broke *for the people with the most to complain about*, while others did fine."
I'd bet the granular work, if it happens, shows the divergence was heavily skewed toward people with assets and education. The folks most likely to answer sentiment surveys are also most likely to own equities that got hammered in 2022, have fixed mortgages they're underwater on relative to current rates, or just spend enough time consuming financial media to internalize narratives about "the everything bubble."
Meanwhile someone making $18/hour who stayed employed, kept their apartment, and maybe saw actual wage growth for the first time in years probably had a different survey response. We won't see clean numbers on this because nobody really segments sentiment data that way — it's usually just national aggregates or income buckets that hide more than they reveal.
The thing that'll mess with any prediction here is that sentiment measures are partly measuring whether people *believe* the economy is real, not whether they're materially secure. That's volatile and somewhat self-fulfilling. Once a recession actually lands and unemployment ticks up, the people with assets will probably feel vindicated (even if they weren't actually right), and sentiment will snap back into alignment with labor data just long enough to feel predictive. We'll call it a leading indicator and move on.
I ran into something related at my last job. We were doing employee engagement surveys in late 2023 — headcount was stable, we'd just given raises, no layoffs on the horizon. The sentiment scores tanked anyway. But when our people ops team actually dug into the comment fields instead of just looking at the aggregate numbers, the picture got messier. People weren't saying "I'm worried about my job." They were saying things like "I don't know what we're building for anymore" and "everything costs more and I'm not sure my raise was real." The first is about organizational direction. The second is about inflation feeling like a moving target even if the wage math worked out on paper.
The Michigan survey asks "how do you think you'll be better or worse off in a year," which is inherently forward-looking and pessimistic when inflation's in the air. That's not measuring whether people are actually fine right now — it's measuring confidence in their own prediction skills. In late 2023, predicting anything felt impossible. Interest rates were a mystery, inflation felt like it could spike again, nobody knew if the soft landing would actually happen. That's not the same as job insecurity, but the survey collapses them together. I'd bet the divergence looked different if you separated "employment confidence" from "general economic outlook," but the index bundles them.
I'd bet the sentiment thing persists even as we move further from the inflation shock. Not because people are irrational, but because sentiment surveys are measuring something that just doesn't track labor market tightness anymore — and maybe never did in a 2020s context.
Here's the pattern I'm watching: if you look at recessions from the 80s through 2008, sentiment cratered because unemployment was about to explode. The index was predictive. But now sentiment might be more tied to asset volatility, narrative stability, and whether people feel they're losing ground *relative to their expectations*. A 3% wage raise feels bad if you thought you'd get 5%, or if you watched your home value plateau after a decade of gains. That's not about the job market being tight or loose. It's about whether the steady state still feels like a win.
My guess: we'll see sentiment stay muted through 2025 even if unemployment creeps up only slightly, because the anxiety isn't about *job loss* anymore — it's about whether anything feels secure. And until the media narrative or asset prices or inflation salience shift hard, those surveys will keep reading pessimistic. Which means they'll stop being useful as leading indicators, and everyone will keep arguing about whether they're broken.