Reimagining Retail: Why Consumer Sentiment is Stuck in ‘Worried’ with Joanne Hsu at the University of Michigan.
21:29 Share

Hello, listeners. Today is Wednesday, April 9th. Welcome to Reimagining Retail, an eMarketer podcast. This is the show where we talk about how retail collides with every part of our lives. I'm your host, Sarah Lebo. Today's episode topic is consumer sentiment. What is it and how does it fit in with other metrics, especially during economic confusion? Before we get into that, let's meet today's guests.

Joining us first are two podcast regulars. First up, we have one of our analysts, Suzy David-Canyon. Hi, Suzy. Hi, thanks for having me. Thanks for being here. Another one of our analysts, it's Zach Stambour. Hey, Zach. Hey, Sarah. Hey, Suzy. Hey, Zach.

Our third guest is someone I am personally kind of fangirling over. It is Director of the University of Michigan's Surveys of Consumers, Dr. Joanne Xu. Hey, Joanne. Thanks for having me. Yeah, thanks for being here. Let's jump into what that title means. So the University of Michigan, go blue, puts out an index of consumer sentiment twice a month.

It's twice a month because it changes so often. The most recent numbers were put out on March 28th, so before tariffs set in. The most recent numbers were put out on March 28th, so before tariffs set in. And keep in mind, anything with tariffs could be changing. This is all really up in the air. But the most recent numbers charted consumer sentiment at 57.0, which is a 12% dip from the month before and the third straight month of waning confidence.

Obviously, this is survey data, there's a lag, things are dynamic. But Joanne, starting at a high level, can you explain what the index of consumer sentiment is and how we come to this number?

Absolutely. The University of Michigan has been collecting data on consumer sentiment for over 75 years. So we have a really long history of measuring consumer views toward the economy. Specifically, the Index of Consumer Sentiment reflects five different questions about people's views towards their personal finances, buying conditions for big ticket items, and business conditions, both as they are right now and how they envision it going in the future.

The reason why these measures are so important is because consumers make their decisions based on where they expect the economy is going. Whether they feel confident about the future or if they're feeling pessimistic about the future, those are things that will weigh on their decisions today. That makes sense. Thank you for sharing that. Let's talk a little bit about how that relates to actual consumer spending patterns. Zach, I know this is something you write about a lot.

How does consumer sentiment relate with actual spending patterns? And what does it say about the overall health of retail? Well, so it's a soft economic indicator. We have hard economic indicators. And we blend that together to try and gauge where things are headed or try to forecast where things are headed. And so they align somewhat. And you don't have to go that far back. Just go back to the Biden administration to see how...

consumer sentiment does or does not align. So we saw with inflation, consumer sentiment fell because inflation felt jarring, but people still had money in their pocket and still continued to spend. So it gives you a sense of how people are feeling, which can tell you how they're likely to behave.

Well, and for me, it's like a mixture of both consumer confidence, their optimism or pessimism around their own financial wherewithal and where the economy is going into the future. But it's also about financial stability, right? So the more uncertainty there is,

is, the more complex it becomes for an individual to feel really good about their positioning. And then you throw in things like what Zach was talking about, like how is their income? How are they feeling about unemployment and wage growth or not? You know, how are they feeling about their access to capital or debt ratio to income ratio? I mean, there's so many different sort of as you peel the onion. But this for me, too, is that the onset what to look at.

And it is interesting to see that it has fallen for the last three months, which is not a great indicator. Yeah, that trend line seems like the overarching headline here. During the Biden administration, we talked a lot about how the vibes, which I think can be directly tied to the consumer sentiment, felt bad, but spending was actually bad.

I feel like that's kind of changing now, now that we have that three-month trend line. Not only that, but we are in a different situation than we were two years ago. So two years ago in 2022, mid-2022, we hit an all-time historic low in consumer sentiment.

And that was, of course, amid this peak in inflation. But in spite of that, people were still willing to spend because labor markets were really strong, stock markets were roaring. And so people felt quite secure in their own incomes and wealth, even though they really felt terrible about the economy. And just like half the economic analysts out there were expecting a recession.

Those supporting factors aren't in play right now. So in addition to the five questions on consumer sentiment, we also measure inflation expectations, labor market expectations, income expectations, stock market expectations, and across the board and across demographics and across the political spectrum.

people have a consensus view that things are getting worse along all of these dimensions. And so that's the thing that I find most alarming right now. It would be one thing if people just had bad vibes about inflation, but actually felt pretty strong about their incomes. They felt like if they wanted a new job, they could get it. But now what people are telling us is they're expecting their income growth to weaken. We have two thirds of people expecting unemployment to go up in the year ahead. And that's the worst we've seen since 2009. And

If you are expecting labor markets to unravel or you're not expecting your own income growth, it's hard to see how the robust spending that we saw in 2022 can necessarily be sustained today.

What I find so interesting about that is that it's across the political spectrum. Quite often we see a divide, but that's not the case here. It seems like what is happening is resonating with consumers in a very particular way. This worsening of sentiment that we've seen over the last three months, you know, for Republicans, they had a post-election bump, a post-election high, and they do think that the outlook under Trump is better than it was under Biden.

But even Republicans and most critically, independents, they agree with Democrats that the outlook has soured over the last couple of months. And we see this also across age group, across education, across income. This is across the board. Yeah. Can you talk about those demographics a little? Are there age groups that are more confident than other age groups, older versus younger, same with high income versus low? So historically speaking, we generally see higher income families have higher

more favorable sentiment than lower income families. So there's an income gradient. And same thing with an age gradient. We actually usually have younger people tell us they have higher levels of sentiment than older generations. So we have 75 years of data, so we have a lot of history to look at, and that's the general historical trend. But we've started to see a convergence across income. This decline we've seen over the last three months

we saw some huge declines among higher income people. So in terms of aggregate demand for the entire macro economy, this is really problematic because higher income consumers, they generate the vast majority of aggregate consumer spending. And I think one of the reasons why consumer spending remained so robust despite bad vibes in 2022, 2023, was that actually sentiment for higher income people decreased.

recovered pretty quickly. So they felt pretty good about their own situations and could spend. And now we're not seeing that confidence. We're seeing really a true souring of expectations, particularly for this very important high. And I feel like there's a whiplash effect right now, right? The headlines are up, down, up, down, the stock market up, down. There's like

truly financial fragility that is very clear and everyone, no matter what your budget is, big or small, feels like it's under pressure and that you don't really know what's going to come next. So that I think is where we turn from like purely economic conversation to where retailers

can take this information and do something with it. Zach, several episodes ago, I think it was you talked about like uncovering that 2009 playbook and putting it back into playbook

action. Do you still feel that way? Yeah, kind of. I think all that retailers can do is act fairly conservatively here and avoid sticking their neck out by ordering too much inventory or being overly promotional where they eat into their margins or any of those things. So yeah, I don't think there's a clear label here.

I think you have to take this step by step and just be as mindful about the shifting conditions as you can be. And I would include, I don't know what the 2009 playbook was specifically, but I would include making sure that as you're keeping an eye on your sales, that your inventory levels are, the ratio is right.

more measured. So it's what Zach was saying, but I would include making sure that you have a flexible delivery and distribution model so that you have pooled stock or that you have inventory that is

global, like sort of kept together in one spot and that as stores sell out of their inventory that you start shipping it to those so that you really have the product where it needs to be versus having too much stuff left over in any one place and making sure that you use, if you're not already, you should be doing ship from stores so that you really liquidate through your inventory, hopefully at the actual price and not on promotion.

Susie, that ratio you just mentioned, is that the ratio of like ordered inventory to sales? It's called turn. The turn. So the number of things that you have versus the number of things that you're selling. It's category specific, so it just depends on what categories you have. But it's really critical to make sure that you are not pulling back too much because then you're going to lose out on sales, but not over ordering too much.

And keeping, you know, there's also this whole idea around making sure you have more flexible distribution from a manufacturing perspective and being able to order just in time versus, you know, six monthly times, which if more manufacturing moves into the U.S., that'll be easier to do. Yeah, which I'd imagine it might. I mean, I don't know. I don't know what's going to happen with tariffs at all. But clearly, that's the intention there.

That makes sense from an inventory perspective. During the high inflation of 2023, was that the year we were seeing the highest inflation? I honestly cannot remember anymore. It feels like it's been so long. We saw retailers really cutting their prices and offering discounts and offering rewards so that their products felt affordable.

Can they still do that? Is that still a strategy they could take or are the margins too slim to consider that? Well, they did that because they had a glut of inventory because people weren't buying things because inflation drove prices up and they just people refrain from from splurging on discretionary items. So for in the near term, retailers can certainly do that with the inventory that they have on hand to make sure that it moves.

In the mid and longer term, I'm not sure that will be the case because costs will rise. I have a slightly different perspective in that promotions and coupons and buy one, get one free and all of that.

loyalty rewards, which sub in as promotions. All of that is part of what a retailer needs to do. They just need to understand unit margin so that they figure out what are the right levers to pull to get people into your store so that they're buying from you. And when they're there, hopefully they'll buy other stuff and increase their basket size.

I want to move back to consumer sentiment then, because I think that that is where those levers are coming from. What specific economic indicators, be it employment, be it inflation, are most specifically impacting consumer sentiment, do we think? So consumers, the typical consumer is not

waiting for the unemployment jobs report or the most most recent CPI report but they're really pulling in information from all around them and that includes their direct experiences talking to their friends as of course it involves the news as well so what I'm seeing now that's different from last year is a lot more concern about labor markets and their own incomes and that was something that was not really on people's radars for the last couple of years because labor markets were so strong

Now, unemployment rates haven't actually gotten that high yet, but people are anticipating that it's going to get worse. They've noticed that there aren't as many help wanted signs as what we saw a couple of years ago. And there's some, you know, in some sectors, it's getting more and more difficult to land a new job quickly. And so I think this is something that people are paying attention to. Another thing that people, that's really weighing on people is

as discussed on our survey, is tariff policy, economic policy. And in particular, people are really concerned about the constant changes and the movement, the constant movement of economic policies. And consumers are finding it very difficult to deal with this uncertainty. It makes it really difficult

to plan. What we have seen is that almost half of consumers are spontaneously mentioning tariffs on the survey without us even prompting. And those who mentioned tariffs, they are really expecting a resurgence in inflation. So these folks are quite worried about the trajectory of inflation. I think consumers recognize that inflation today isn't as bad as it was a couple of years ago. Of course, they remain very frustrated by high prices, but they are worried that inflation is coming back.

Joanne, I'm curious, those mentions of tariffs, do you know if those differ across political affiliation? We see a lot more concerns among Democrats, but we have 40% of independents as well who are spontaneously mentioning tariffs. And again, they are concerned that tariffs are going to bring back inflation. Among Republicans, we don't see as much concern for them, but many of them are mentioning tariffs as well. Overall, Republicans...

appear to believe that the policy the policies that are being implemented from the top are going to lead to a sharp slowdown in inflation the ends justify the means kind of thing well not only that that they expect those ends to come into play very quickly

And we have year-ahead inflation expectations of 1% or less among Republicans. So they're expecting inflation to slow down very, very quickly. And when that doesn't come to bear...

As it's unlikely to, given what we know about how tariffs pass through to the economy, we'll see how their views change. But at this time, we do have a pretty sharp divergence among Republicans and Democrats. But I would point to the independents. You know, the independents are a huge share of consumers. They are broadly quite worried about tariffs.

As a consumer, I am getting all of my information from everywhere, from a lot of different soft sources. If I or a friend of mine or a family member loses their job, then I'm concerned about employment versus the employment numbers coming out. If egg prices are expensive, then that's a real marker for all food prices. Even if all food prices aren't as high, I'm concerned about that.

My question here is that that's the case from a consumer perspective. As a retailer, I can't necessarily read the vibes in the same way. So what should I be looking at to prepare?

I mean, I think it depends on what categories you're selling and what channel you're in. And so like if you're a club or a dollar store, you might be thinking about or like an outlet store or a TJ Maxx style. I think you're going to be looking for different things. But at the end of the day for me, I would say understanding how much people have saved because that's what they're using to spend money on extras, not the groceries. Right. And then understanding how

how much people are in debt are probably so it's two things together, savings and debt.

And then what I thought is frightening because every retailer is also reading the news, right? And the New York Fed Reserve has this survey since 2015 that has a question around how likely are you to be able to absorb a $2,000 bill that you were not anticipating and that rose to 62. So two-thirds of the population is not able to withhold a $2,000 bill. That should be something that is worrisome for retailers. Yeah. Yeah, it's...

April 11th right now, tax day is right around the corner. I wonder if we're going to see the same sort of tax return bump that we see around this time or if people are going to be holding onto those a little tighter. So I have this like theory about the cost of living crisis weighing on consumers and their inability to afford a car and a house

being a factor in terms of the vibes during the Biden administration and that like carrying over now and then you add in the tariffs and it just creates this like very challenging situation

I mean, I think that when we talk about, when we look at the fact that consumer sentiment is below its historical average, has been below its historical average for some time now, despite other economic indicators being quite strong, I think one of the big reasons for this is this cost of living issue, how it's harder to save for long-term savings goals than it was before, to buy your first house, to pay for college, save for retirement, things like that.

And I think that could be one of the reasons why not just economic sentiment, but other attitudinal indicators are lower now than they were prior to the pandemic. And of course, we can't forget what a sharp break in our experience the pandemic was. That's such a good point. I mean, are we ever, we see in the Consumer Sentiment Survey, we also see this from the Consumer Confidence Board, that even when things are rising, they're still rising like

not necessarily relative to pre-pandemic. Are we ever going to see the confident consumer of 2019 again?

I think the thing we should really be focusing on are the trends. And, you know, we're not going back to 2019 in real life. And I don't think we should expect anything to go back to 2019 attitudes. We just can't put that genie in the bottle. But that being said, what's still really informative is to look at these month-to-month, quarter-to-quarter trends. Yes, we might be below the historical average. We were 100 in 1966. We're like...

40% below that now, does that mean we were 40% less happy about the economy than we were in 1966? Like, well, we were totally different people back then. Half the population was informed back then. But I think what's more useful than looking at the levels and comparing the levels over history is to see where the trajectory is going. And for most of last year, the last six months leading into the election, consumer sentiment was on

on the upswing pretty consistently, slowly and steadily moving up. And that bump continued after the election. And since then, it's been three straight months of of sharp, sharp deteriorations. And so, you know, how that compares to 2019 is, I think, less important than the fact that we have three straight months of declines. These are declines across demographic group and across different dimensions of the economy. So I think the signals are pretty clear, regardless of how it compares to prior to the pandemic.

Yeah, I think that sums it up nicely. The signals are clear and for retailers it means you really have to be paying attention to inventory and discounting and you have to be doing that now. This isn't a later thing. This is here. Okay, well that is all we have time for today. Joanne, thank you so much for joining us today. My pleasure. Thank you, Zach. Yeah, thanks for having me. Thanks, Susie. Thank you. Thank you to our listeners and our team that edits the podcast. I have full confidence in them.

We'll be back next Wednesday with another episode of Reimagining Retail, an eMarketer podcast. And on Friday, join Marcus for another episode of the Behind the Numbers show.