Goldman Sachs says ‘lower happiness’ — not the economy — explains why consumer confidence hit its second-lowest level

Consumer confidence fell to its second-lowest level on record in September, and Goldman Sachs says the economy is only part of the reason. Americans, the bank told its clients, have grown unhappier with the state of the world in general.

In a note to clients reported by CNBC on September 19, Goldman economist Joseph Briggs wrote that “low reported economic sentiment likely reflects a more fundamental, downbeat assessment of the state of the world rather than the economy.” “Lower happiness” across the country, he said, helps account for the gap between the grim survey results and data like GDP growth that show the economy expanding.

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The index comes from the University of Michigan’s Institute for Social Research, which has tracked how households feel about their personal finances, business conditions and buying conditions since 1952. Wall Street treats it as one of the main gauges of consumer confidence. The preliminary September reading, released September 11, fell 7.5% from August and 13.2% from a year earlier. The only lower figure on record was May’s 44.8.

For perspective, COVID-19 never pushed the index below 71.8, and the Great Recession era’s low was 55.3. May’s 44.8 came in under both.

Meanwhile, the Federal Reserve raised rates a quarter point on September 16 to a range of 3.75% to 4%, its first hike since 2023.

Fed Chair Kevin Warsh said the central bank moved because inflation “is too high and has been for too long,” while pointing to improved job openings, unemployment rates and business investment as evidence of the economy’s resilience.

So how can people feel this bad about an economy their own central bank considers resilient? Economists have been asking some version of that question since the pandemic, and Briggs’ note is Goldman’s attempt at an answer.

What the happiness data shows

Briggs pulled his evidence from the University of Chicago’s General Social Survey, which has asked Americans about their lives since 1972. In 2016, 31% of respondents told the survey they were “very happy.” By 2024, that was down to 23%. The share answering “not too happy” went the other direction over those years, from 13% to 20%. Briggs noted that happiness fell during the pandemic and hasn’t returned to its pre-pandemic level.

Happiness has also fallen faster than Americans’ satisfaction with their own finances, Briggs found. He traced much of that to shrinking trust in public institutions, which caused a “disproportionate amount” of the drop in recent years.

Joanne Hsu, director of Michigan’s Surveys of Consumers, told CNBC earlier this year that the multiyear slide in sentiment lines up with other readings showing Americans are less happy and less trusting of institutions than they used to be.

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Inflation is still part of the story

Briggs said inflation is likely still weighing on confidence too, and the September survey backs that up. Year-ahead inflation expectations jumped to 4.6%, the highest since June, as fuel prices climbed with the Iran conflict. Consumer prices were up 3.4% year over year in August, according to the Bureau of Labor Statistics, and real average hourly earnings fell 0.3% over the same 12 months.

“Year-ahead expectations for both personal finances and business conditions plunged,” Hsu said when the report came out. Sentiment worsened among both Democrats and Republicans, she said, and the index now sits 16% under its February level, from just before the Iran conflict started.

Why you should brace up with budgeting

Briggs told clients not to count on sentiment rebounding just because the economy stays on track. He also warned that the index may not tell forecasters as much as it used to about what consumers will do next, which is the main thing Wall Street uses it for.

People still expect inflation over the next year. So if consumers are right to expect 4.6% inflation over the next year, gas and groceries will feel it first, and the Fed’s rate hike means credit card and car loan rates are (most likely) set to climb, as well. Those are things you can plan around.

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This article originally appeared on Moneywise.com under the title: Goldman Sachs says ‘lower happiness’ — not the economy — explains why consumer confidence hit its second-lowest level

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