Consumer Says: When Consumer Expectations Do Not Match Reality

Various macro indicators were released last week, and more will be released this week. This newsletter edition will touch on these government releases and explore what they mean for the U.S. economy, alongside Morning Consult data on consumer finances. 

What’s new in the economy?

Previously, our podcast provided a temperature check to assess the latest data releases. We set 70 degrees as the benchmark–the “perfect temperature”. Sometimes, we offered a temperature on a specific component of the economy, such as the labor market; other times, we gave a measure for the state of the U.S. economy. 

☁️For the last two months, our temperature readings have been falling, not plummeting, as government economic data continued to show resilience. The temperature looks better this week (65), with hard data from unemployment to the consumer price index coming in at or better than expectations, supported by a rebound in soft data, particularly the consumer sentiment.

That said, plenty of risks continue to cloud the outlook. There is still a lot of uncertainty, and a 30% tariff pause with China, in addition to all the other tariff measures in place, will provide worse conditions in the second half of the year than in the second half of 2024.

Consumer says:

🟡Labor market data released last week showed that U.S. unemployment stayed at 4.2%, near the historical low. The data point does not necessarily reflect the weaker future employment conditions anticipated by the Census Business Trends Survey and the New York Fed Empire Manufacturing Survey, among others. For those employed, it is a stable labor market with low levels of layoffs, supporting continued spending (and perhaps enabling some consumers to pull forward larger purchases). 

• 📣Consumer says: Morning Consult’s labor tracker also shows the unemployment index (which mirrors the unemployment rate) at low levels, but workers know that the leverage remains with the employers. Read more on the State of Workers from Amy He.

▶️ The Consumer Price Index released on Tuesday came in lower than expected. As tariff conversations were at the forefront of consumers’ minds, perhaps the expectation was for a faster price bounce. However, price transmissions take time, especially for the effect to show up in the top-line figure in a way that is recognizable to the consumer. While some studies show that transmission has already started, perhaps consumers expected a higher and faster pass-through rate (read more here on consumer expectations) and therefore were not as surprised by the price increases they encountered in April.

• 📣Consumer says: Morning Consult’s Inflation and Supply Chains tracker showed a mixed picture for its price surprise measure (net share of consumers reporting higher than expected pricing) among the 21 categories we surveyed. Excluding housing, the price surprise index ticked down in April, following the decrease in March. The most recent inflation shock memories in consumers’ minds are the pandemic price spikes and empty shelves. At this point, reality does not yet match expectations that may mirror the pandemic times. 

💵 The advance monthly retail sales (MARTS)–the first official read into how consumers spent their money in April–will be released tomorrow. Last month’s release showed strength as consumers pulled forward purchases ahead of the Liberation Day tariffs (also potentially supported by tax refunds). The expectation is for a flat reading in April.

• 📣Consumer says: Morning Consult’s Consumer Spending tracker shows similar conditions to the expected MARTS release. In month-over-month terms, consumers pulled back spending slightly, most of it driven by high-income households, whose outlays in the previous month were higher due to tariffs. While the lower spending amounts for April may be concerning, it is likely not a trend but simply a reflection of adjustments by high-income households with relatively more flexibility to change their monthly spending.

👝 How were consumers able to spend this way in the first quarter?

Impending tariffs, a boost from tax refunds, and inflation rates close to the Fed’s 2% goal could have compelled those with a job to keep spending, perhaps spending more than they had planned in the first quarter. However, consumer finances back up all of that spending. While we find rising delinquency rates reported by the New York Fed concerning, Morning Consult’s survey on household finances also shows that consumers have taken measures to improve their financial standing, especially by saving more. Read more on Sofia Baig’s analysis here.