Markets & Economy

Could Weak Consumer Sentiment Manifest a Recession?

Many consumers feel bad about the economy—worse than during March 2020 and almost as bad as they did during the Global Financial Crisis of 2008! Are these negative feelings valid?

Published by Motley Fool Wealth ManagementWed, Apr 13, 2022

read time 5 min read

Life coaches talk about manifesting the life you want to live. Some even prescribe steps toward making your dreams come true. This made us wonder if consumers could manifest economic growth (or lack thereof).

Let’s start with a question: Do you feel good about the economy? If you don’t, you’re not alone. (Bear with us here—there’s a lot of economics in the following explanation, but we think you’ll find it quite interesting!)

Many consumers are not feeling particularly confident about the economy

Actually, they feel really bad—worse than during March 2020 and almost as bad as they did during the Global Financial Crisis of 2008!


Source: University of Michigan Consumer Sentiment Index,, March 2022.

This chart shows the latest Consumer Sentiment Index. The readings started to decline in 2021 and recently hit basement levels, far below those from the COVID-19 pandemic era and near the feelings during the Global Financial Crisis. Similar findings are coming out of the Consumer Confidence Index as well.

Yet these negative feelings don’t necessarily jibe with recent economic data

Here are a few data points to noodle on:

  • Labor is robust. Initial jobless claims are at the lowest level since 1969, and the unemployment rate is at 3.8%.1 In other words, if you want a job, you can likely get one!
  • The economy is booming. Fourth-quarter gross domestic product (GDP) for 2021 was 6.98% bringing 2021 real growth to 5.7%.2 Moving forward, forecasters expect 2022 real GDP of 3.7%.3 (Recall “real” GDP is actual GDP minus inflation.)
    Yes, forecasters expect rates of GDP growth to decline from 2021 levels. But that's because 2021 benefitted from the continued reopening of the economy post-pandemic. This year's forecast is still far above the trend since the late 1980s.4 
  • Manufacturing remains strong. The latest purchasing managers index (PMI) reading of 58.6 is firmly in expansionary territory and far above those that preceded all recessions since the late 1970s.5 Although manufacturing is just a small part of the U.S. economy, it’s another positive data point.

 However, there’s a “BUT” lurking around the corner…inflation

Inflation has hit 40-year highs. The consumer price index (CPI) and the Personal Consumption Expenditures Index (PCE) rose significantly over the last several months.6 The latest CPI reading released on April 12, 2022 shows inflation rose 8.5% over the last 12 months.7And it's the "right in your face" type of price increase—with goods such as gasoline and food climbing dramatically. But even if you exclude food and energy, prices are still up 6.5% from last year.7 Not only are the higher prices obvious, the increases feel like they happened overnight. It’s like climbing the face of a mountain rather than winding slowly around it as you ascend.

So yes, the labor market—both job and wage growth—is strong. We already mentioned the low unemployment rate. And average hourly wages have increased by 5% over the last year.8 BUT, wages have lagged the rise in inflation. Maybe this is where the low feelings are stemming from—because although wages have risen, prices have increased more, so consumers are still losing purchasing power.

That’s not the only “BUT” related to the labor market. A too strong labor market can be the cause of the inflation. Today that seems to be the case—at least partially. One of the things the Fed’s monetary policy tries to do is raise the unemployment rate. Yes, you heard right. Sounds counterintuitive, but an unemployment rate that is too low can be bad for the economy.

However, there’s good news—households are strong (historically so!)

Households are in great shape—assets (what you own) have reached $169T, with liabilities (what you owe) only $18.4T, driving net worth to $150T.9 That’s the highest level ever!


Source: The Fed Z.1 Financial Accounts of the United States. Data includes assets, liabilities, and net worth for households and nonprofit organizations, 1952-2021.

BUT (yes another “but”!) maybe this is also where the pessimism originates. A significant portion of asset growth has come from investments (equity prices) and the rise in home values. Unfortunately, not everyone is participating in that growth. Lower-income people who are locked out of housing markets and/or don’t own stocks may not feel the optimism the above chart elicits.

Teasing out the good and the bad

We know that labor is booming, wages are rising, the economy is expanding, and household net worth is soaring. All positive data from the consumer’s standpoint. But inflation is running hot—it’s actually sizzling as more than 60% of the price inputs that go into calculating CPI have experienced a huge run-up. Is that enough to offset the positives? Let’s check the analytics.

The study of economics likes models. In the past, models could correlate sentiment to jobs, higher gas prices, or the sluggish economy. This time, those relationships are not holding up. Instead, other factors—perhaps lingering pandemic-related fears, geopolitical uncertainty, or the scarcity of certain types of goods—could explain the bad feelings.

Or, as some forecasters believe, inflation is so concerning, it seems to be overshadowing all the good news. For example, in the recent Michigan consumer sentiment survey, "Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions." And mentions of reduced living standards were similar to those during the Global Financial Crisis and the 1979-1981 inflationary period.10 

Despite some robust economic measures, consumers’ sentiment may slow the economy

When consumers are feeling downtrodden about the economy, even if current economic data are fairly strong, their fears could cause them to hoard their cash and stop spending. This, in turn, could cause a ripple effect—reducing corporate revenues, which could secondarily decrease hiring and hurt the labor market, causing consumers to worry about their jobs and pull back spending even further. It’s what the Fed hopes will happen when they raise rates to arrest inflation. The ripple effect could induce a recession, although the Fed’s desire is a cooling of the economy—a soft landing—and not a recession.

So could weak consumer sentiment manifest a recession? In a way, perhaps. But the devil lies in the details. And one way or another, the economy must slow down. Whether that brings about a recession or ends in a soft landing has yet to be determined. 

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1 Bureau of Labor Statistics. Update through March 26, 2022.

2Bureau of Economic Analysis. Through 4Q 2021. Updated March 30, 2022.

3Philadelphia Fed, First Quarter 2022 Survey of Professional Forecasters. Feb. 11, 2022, March 2022, March 2022

6Bureau of Labor Statistics. Data through Jan. 31, 2022

7Bureau of Labor Statistics. Data through Mar. 1, 2022

8Board of Governors of the Federal Reserve System. Through 4Q 2021

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