Worst Sentiment Since 1981, Are Massive Job Losses Coming?

Key Concepts

Consumer Sentiment Index: A measure of consumer confidence in the economy, published by the University of Michigan.
Tariffs: Taxes imposed on imported goods, which can impact consumer prices and business conditions.
Inflation: A general increase in prices and decrease in the purchasing value of money.
Labor Market: The supply and demand for labor, including employment rates, wages, and job security.
AI (Artificial Intelligence): Technology that enables machines to perform tasks that typically require human intelligence.
K-shaped Economy: An economic recovery where different sectors or income groups experience vastly different outcomes.
FOMC (Federal Open Market Committee): The monetary policymaking body of the Federal Reserve System.
Dual Mandate: The Federal Reserve's objectives of maximum employment and stable prices.

Current State of Consumer Sentiment:

Consumer sentiment has hit near-record lows, significantly below levels seen in 2017-2019, where the baseline was around 100, and current levels are approximately half of that.
The latest data point is lower than a slight improvement observed after the bottoming of sentiment in April 2025.

Key Drivers of Declining Sentiment:

Affordability and Cost of Living: This is the primary concern for consumers, with pressure felt on both income and expenditure sides.
Inflation: Consumers are not confident that inflation will not return, and they feel precarious about its potential resurgence. While not bracing for a worst-case scenario as in April/May, they broadly expect inflation to come back.
Labor Market Precariousness: Consumers are highly concerned about job security and potential job loss.
- 71% of consumers expect unemployment rates to go up in the next year.
- The potential for job loss for oneself or a spouse in the next 5 years is "extremely elevated."
- 29% of consumers report that weakening incomes are currently dragging down their personal finances, a sharp increase from 20% the previous month.
- Weakening incomes can stem from job loss, inability to find new employment, or exhaustion of unemployment benefits.
Tariffs: Despite a slight decrease from its peak, approximately 60% of consumers continue to mention tariffs, expressing worry about their pass-through to prices and potential weakening of business conditions.
Government Shutdown: While not the primary reason for low sentiment, the government shutdown (ending last week) and its impact on programs like SNAP (Supplemental Nutritional Assistance Program) contributed to the downtick. The share of consumers spontaneously mentioning the shutdown quadrupled between October and November, reaching about 10% by November 7th.

Impact on Spending and Purchases:

Consumers lack confidence and do not feel they are thriving, leading to a reluctance to make major purchases like cars or durable goods. They perceive it as a "terrible time to buy" due to high prices and the commitment of multi-year installment payments.
Holiday shopping may see spending on lower-cost items, particularly from those whose incomes have not yet weakened.
Inflation Expectations vs. Current Reality: Consumers are aware that inflation is slowing but remain frustrated by the persistence of high prices. Approximately 48% of consumers mention high prices dragging down their personal finances.
Nominal and Real Income Growth: Growth in both nominal and real incomes is extremely weak, with nominal income growth being steady but at "anemic levels."

The K-Shaped Economy and Wealth Disparities:

A significant divergence in sentiment is observed between different income and wealth groups, indicating a K-shaped economic scenario.
Higher Income/Wealth Consumers:
- Their sentiment actually increased by 11% in early November, particularly those with the largest stock holdings.
- Stock market gains are supporting their sentiment, and they are the primary beneficiaries of these gains.
- They are more confident about their incomes and wealth compared to lower-income individuals.
- However, even these consumers are not in "favorable territory" and still hold "generally dour views of the economy."
- Evidence suggests that wealthier consumers are also becoming "deal hunters," trading down or substituting away from more expensive goods, indicating they are not immune to economic concerns.
Lower Income/No Portfolio Consumers:
- Their sentiment has continued to decline.
- They are focused on "pocketbook issues" like income and inflation.
- They do not have portfolios to benefit from stock market gains.
- They are more vulnerable to weakening incomes and potential job loss.

Historical Context and Current Differences:

Current sentiment levels are comparable to those in 1981, a period of high inflation and recession. However, current inflation and recessionary indicators are not at those levels.
Information Environment: The current news environment, characterized by a 24-hour news cycle and social media, contributes to a different consumer reaction to inflation compared to the 1970s and 80s, where news sources were more consolidated. The "tenor of news about inflation is totally different now."

Government Shutdown and Potential Stimulus:

The government shutdown's impact on SNAP benefits and the need for reapplication may have contributed to worsening sentiment.
A proposed $2,000 dividend for families making less than $100,000 annually could provide some support to consumer sentiment if enacted and directly reaches pockets.
However, consumers may be less likely to react quickly to policy announcements and will wait to see if the money actually arrives.
A one-time stimulus may not fundamentally change spending habits, as consumers may save it or use it to pay down debt, especially those with lower incomes who carry debt burdens.

Federal Reserve and Monetary Policy:

The labor market is showing signs of significant weakening, with reports of unemployment potentially increasing to 4.4% in September.
There is uncertainty regarding the number of rate cuts the Federal Reserve will enact due to rising inflation.
Fed Vice Chair Jefferson's statement highlighting increased downside risks to employment compared to upside risks to inflation is significant.
Policymakers face a "tough path ahead" with risks on both sides of the dual mandate (maximum employment and stable prices).
The FOMC will be making decisions without October data, likely leading to dissents.

Long-Term Impact of AI:

The long-term impact of AI on consumer sentiment hinges entirely on its effect on labor markets.
If AI proliferation does not negatively affect overall employment levels, it is expected to boost sentiment and make consumers feel better off.
However, consumers may not feel positive about AI personal assistants if they have lost their jobs due to AI adoption.
The key factor is whether firms use AI to increase productivity or to replace workers.

Where to Find More Information:

Consumers can stay updated on consumer sentiment data by visiting the University of Michigan's website: www.sca.isr.umich.edu. The website is updated at 10:00 a.m. on each data release and provides links to special reports and data downloads.