Several of my recent posts focused on the mystery of why Americans continue to spend like crazy when surveys indicate that consumer sentiment is terrible. Unfortunately, I did not have a persuasive answer. To add to the conundrum, the University of Michigan Sentiment indicator declined a further 10% in May to an all-time low!
In any case, why is sentiment so poor? After all, at 4.3%, the unemployment rate is comfortably below the long-term average of 5.7%. Household net worth has increased 70% since the beginning of 2020. Consumer debt payments account for 5.4% of disposable income which compares to more than 7% in the early 2000’s. Finally, the stock market is at an all-time high suggesting that most 401K accounts have grown nicely. What’s not to like?
Most people’s frame of mind is understandably shaped by their personal experience and circumstances rather than by reported economic statistics. In other words, they have an intuitive sense of whether they are better or worse off compared to the past. This next graphic quantifies what they must be feeling, and this data is likely the source of much of the discontent. The orange line shows inflation, the black line wage growth, and the blue line growth in real or after-inflation wages, all on a cumulative basis since January of 2021. Note the footnote explaining that the break in October of 2025 was due to the government shutdown which temporarily interrupted data collection. As indicated, wages grew 25% during this period, but prices rose 26.5% meaning that the average person’s buying power actually fell by 1.2%.
No wonder many people are discouraged! Despite hard work and healthy wage increases, their income buys a little less today than it did five years ago.
Where do we go from here? The current outlook is incredibly murky. Annual wage growth decreased from 6.7% in 2022 to 3.6% currently. However, inflation also declined to a 2.5% annual clip in the first months of 2026 generating optimism that we were on a path to positive real wage growth. Unfortunately, price increases accelerated to 3.8% in April and preliminary forecasts for May suggest they could exceed 4%. It therefore appears that real wage growth is not in the cards for at least the near future. There are obviously other factors involved in consumers’ mindsets, but the lack of real income growth means they are likely to remain grumpy for the time being. The key question for the overall economy is whether they continue to spend despite their negative outlook or tighten their belts.