American Consumers’ Optimism Fades, What Does This Mean for Near-Term Consumer Spending?

The index of consumer sentiment (ICS) in the United States has been generally moving up since the elections in November 2024. Putting the partisan divide aside, consumer sentiment tracked by Morning Consult daily, has increased from 96.4 on November 3, 2024 to 103.4 on January 26, 2025 (*data is presented as a 5-day moving average).

After the elections, consumers almost immediately grew more confident about their future personal finances as well as business conditions  with their views on current personal finances and buying conditions following suit, albeit with a slight delay. 

However, this honeymoon period has appeared to end: Shortly after the inauguration of President Trump, Morning Consult’s daily consumer sentiment data began to dip. The decline has been precipitous and is on the path to erase the post-election boost noted above. Since the inauguration, economic news has generally been in line with market expectations, therefore the shift in sentiment could be partially attributed to the changing political environment.

The demographic detail

Declines in sentiment were widespread amongst different demographics. Among the different cohorts, the deepest drop for the three-way income group was for middle-income adults: those with a household income of $50-$100k. All generations also exhibited a downturn, with millennials taking the lead on souring sentiment. Furthermore, the three main community types had declining sentiment indexes. After a dramatic increase in post-elections,  sentiment for rural consumers also began to reverse course. 

What does this mean for consumer spending?

While the consumer sentiment index provides a useful and real-time gauge on how consumers are feeling about the economy overall and their personal finances both near-term and long term, it alone doesn’t determine the direction or magnitude of consumer spending. There are many other indicators ranging from employment, inflation to the savings rate that are also crucial in determining the near term spending trajectory.

Using Morning Consult’s daily data, we have developed the Consumer Health Index (CHI), which combines the unemployment index as well as the current personal financial conditions component of the ICS (both daily metrics) to estimate consumers’ overall demand. At this point, despite the declines in ICS, CHI for all adults is not showing a contraction. In recent weeks, it has reached a neutral territory and has been hovering around that “no change” level. 

Why the lack of change?

Among the five indexes that make up the consumer sentiment, 4 out of 5 have dropped. The only exception is personal finances: current conditions, which is the index used in calculating the CHI. The unemployment index, the second component, gets integrated into the CHI as a lagged indicator. Although the unemployment index ticked up recently, this change is not yet reflected in the consumer health index.

Therefore, although the swift downturns in sentiment require close attention especially for their duration and magnitude, it does not necessarily imply an imminent contraction in spending. Declines in ICS need  to be coupled with other deteriorating metrics to prompt spending changes, and in this case other economic metrics remain fairly robust. It is important to note that the U.S. consumer is still facing challenges: on the inflation front as well as the labor environment, specifically those who are looking for a job. However, as shown by the recent report on personal outlays, consumers have continued their strong levels of spending in the final month of 2024.While it remains to be seen if last year’s spending momentum will carry into 2025, it will require more than the dip in sentiment to project a downturn in consumer spending.