Consumer sentiment is in the dumps despite a solid economy. Goldman Sachs blames 'lower happiness'

• The University of Michigan consumer sentiment index dropped in September, falling almost 8% from August alone, reaching record lows for the year
• University of Chicago data shows overall happiness never fully recovered from pandemic-era declines, with the drop in general happiness exceeding the decline in perceived financial satisfaction
• Goldman economist Joseph Briggs notes that decreasing trust in public institutions caused a 'disproportionate amount' of the decline in net happiness, indicating sentiment may not improve even if economic indicators remain strong

Summary

Goldman Sachs attributes persistently weak consumer sentiment to declining overall happiness in society, despite solid economic fundamentals. The University of Michigan's consumer sentiment index hit record lows in 2022, falling significantly in September with an 8% drop from August alone.

Key Findings:

Goldman economist Joseph Briggs argues that "low reported economic sentiment likely reflects a more fundamental, downbeat assessment of the state of the world rather than the economy." While inflation pressures contribute to negative sentiment, broader societal pessimism plays a substantial role in the disconnect between sentiment readings and positive economic indicators like GDP growth and stock market performance.

Supporting Data:

University of Chicago research shows happiness levels never fully recovered from pandemic-era declines. The data reveals overall happiness decreased more sharply than perceptions of financial satisfaction. Additionally, declining trust in public institutions has caused a "disproportionate amount" of the decline in net happiness in recent years.

Market Implications:

Briggs warns that consumer sentiment may remain depressed even if economic conditions continue improving, given its connection to non-economic factors. This could diminish consumer sentiment's reliability as a predictor of future economic dynamics.

Joanne Hsu, director of Michigan's sentiment survey, corroborates these findings, noting the downtrend reflects both decreasing happiness and eroding trust in public institutions.

The analysis suggests investors and economists may need to reassess the weight given to traditional consumer sentiment indicators when forecasting economic performance, as these measures increasingly reflect broader social and psychological factors beyond pure economic conditions.