We analyzed key sentiment indices such as the University of Michigan Consumer Sentiment Index (UMCSENT), the Consumer Confidence Index (CCI), and the Business Confidence Index (BCI). In addition, we looked at various macroeconomic factors including unemployment rates, interest rates, inflation, GDP growth, loan delinquency rates, personal savings rates, stock market returns, and labor force participation rates.
By regressing each sentiment measure against these macro variables and dividing the data by decade, we observed some intriguing patterns. Initially, during the 1980s, most variables were significant and moved in expected directions. For instance, higher GDP growth led to increased consumer confidence, while rising unemployment had the opposite effect. However, as time passed, the predictive power of these variables diminished. In more recent times, only inflation and stock market returns remained consistently influential in predicting sentiment.
Notably, the impact of these variables on sentiment has weakened over the years. For example, a one percentage point rise in inflation during the 1980s caused a 3.4-point drop in the Michigan index, whereas in the post-COVID era, the same change led to just a 1.1-point decrease. Similarly, the Adjusted-R^2, a measure of predictive power, declined from 0.88 in the 1980s to 0.72 in present times.
One possible explanation for this shift could be the growing influence of political partisanship on individual sentiment. The changing political landscape may be shaping people’s views on the economy and, consequently, affecting their confidence levels. As we approach the upcoming US presidential election, this factor may play a crucial role in driving sentiment in unforeseen ways.
In conclusion, traditional metrics like unemployment, labor force participation, and GDP growth no longer provide a comprehensive explanation for consumer sentiment trends. This changing dynamic calls for further research to uncover the underlying causes and implications of this phenomenon. Understanding the evolving nature of sentiment drivers is key to making informed decisions in a rapidly changing economic environment.