“It’s the economy, stupid”

Among rich economies, the US has been the conspicuous outperformer since the pandemic. The US economy has grown at roughly twice the rate of the euro area since  2022. Even the application of sweeping tariffs last April has failed to derail US growth. 

Yet for all the talk of US economic exceptionalism, the US consumer hardly seems to have noticed. The two key measures of US consumer confidence, from the Conference Board and the University of Michigan, are remarkably depressed. 

If you looked at the chart of the Michigan survey, you’d think the US economy was in crisis. In its 70-year history the Michigan measure of sentiment has only been weaker on two occasions – when inflation hit 9% in 2022 in the wake of the pandemic and during the deep recession of the early 1980s.  

The Conference Board paints a less extreme picture but shows confidence at its lowest level in more than ten years, lower even than during the pandemic.

This isn’t what you’d expect when real incomes, consumer spending and wealth are seeing good growth.

Four factors are at work.

First, most of the gains from tax cuts and soaring equity markets are accruing to richer consumers. With the top 20% of US consumers accounting for 60% of consumer spending, higher spending is entirely consistent with most consumers feeling glum.

Second, inflation may be close to normal levels now, but the price level is 24% higher than five years ago. Lower-income Americans have suffered most from sharp rises in rents, food and energy prices. More than three years on from the peak in inflation US consumers are still telling pollsters that their greatest concerns relate to inflation and the cost of living. 

Third, a weakening job market is hitting poorer Americans hardest. Income growth for the lowest-paid workers has slowed sharply in the last two years and is growing more slowly than for high earners. This reverses the trend of the previous eight years in which pay growth for the lowest earners outpaced that for those on the highest pay.  

Fourth, politics colours how people feel about the economy. Research by the University of Michigan shows that having your favoured party hold the White House makes you more positive on the economy. The ‘partisan gap’ remains large, but economic sentiment has fallen even among Republican voters in the last year. 

In the US spending by higher-income consumers, many of whom own shares and their own homes, is holding up, while lower-income households are suffering from slower wage growth, rising unemployment and high prices. This ‘K-shaped’ pattern to activity is playing out for consumer-facing businesses. The chief executive of McDonald's, Christopher Kempczinski, recently said he continued to “see a bifurcated consumer base with… traffic from lower-income consumers declining nearly double digits in the third quarter, a trend that’s persisted for nearly two years”. In the same vein the CEO of Chipotle Mexican Grill, Scott Boatwright, has said the business has seen a “significant pullback” in spending by those earning less than $100,000 a year. 

In general British consumers are less downbeat than their US counterparts. That looks odd given that incomes and consumer spending have risen so much faster in the US than in the UK in recent years. 

One explanation is that growth in spending power has been skewed to lower-income groups. Data from the Low Pay Commission show that since 2019 real hourly pay has risen for lower-income groups but declined for the top 30% of earners. Increases in benefits and the minimum wage have lifted pay at the bottom while tax rises have hit higher earners. This is the mirror image of the US, where gains in spending power have been concentrated at the upper end of the income distribution. 

Like the US, there is a partisan divide on economic sentiment. Since Labour’s general election victory in July 2024 consumer confidence among the over-50s, a group that is more likely to vote Conservative or Reform, has dropped sharply. Younger people, particularly those aged 16 to 29, have become more positive.  

The UK data also show a striking gap between economic pessimism and optimism about consumers’ own finances. A volatile macro backdrop is weighing on economic sentiment while rising real incomes and still low unemployment mean that most people are fairly positive about their own financial situation. 

Economic worries have leached into growing disillusionment with government economic policy and incumbent leaders across the West. In the US public dissatisfaction with the government’s handling of the economy has reached the highest level in the 65-year history of this series.  

“It’s the economy, stupid” is how James Carville, Bill Clinton’s political strategist, summed up what drives US voter behaviour. That’s a sobering thought for many western leaders today.