The Consumer Sentiment Disconnect From Economic Reality

The May reading of the University of Michigan's Consumer Sentiment Index at 44.8 underscores a stark mood signal despite a bout of resilience in the real economy. That reading is the worst since the index began in 1952 and far below levels seen during the 2008 crisis and the 1980 inflation scare. Meanwhile, the S&P 500 has climbed, and Q1 earnings growth ran 27% year over year. Unemployment stood at 4.3% as initial jobless claims remained near cycle lows, adding complexity to the narrative. Retail sales rose 0.5% in April and are 4.9% above a year earlier, while the Atlanta Fed's GDPNow model tracked 4.3% annualized growth for Q2 as of May 21. An 84% beat rate on the S&P 500 during Q1, well above the five-year average of 78%, confirms earnings strength despite weak sentiment. GDP has shown +2% to +3% growth year over year for three straight years, yet sentiment has stayed depressed. The disconnect has grown since 2022, when sentiment and growth once moved in concert. Three observations frame the story: sentiment remains negative even as labor, spending, and credit data align in positive direction; GDP momentum persists despite the mood; and the relationship between sentiment and growth has not recovered to pre-2022 norms. The divergence is not due to a single factor; rather, it reflects a complex mix of psychological and economic signals that has evolved over time.