Anna's Deep Dives

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The economy does not just exist in numbers. It also lives in the minds of people. How individuals feel about their financial future shapes their actions. This section looks into the consumer mindset. It explores confidence levels, feelings about the economy, and the resulting changes in behavior. We will see how people's thoughts and worries guide their spending.

Measuring the Mood: Understanding Consumer Confidence Indices (Conference Board, U. Michigan) and Recent Trends

Several tools help us measure how people feel about the economy. These are consumer confidence indices. In 2025, these measures showed that U.S. consumers felt worried. The University of Michigan Consumer Sentiment Index, or MCSI, dropped to a score of 52.2. This was its lowest point since July 2022. Another measure, the Conference Board Consumer Confidence Index (CCI), also fell. It reached 86.0, its lowest since May 2020. These numbers indicate growing unease among many consumers.

The MCSI gathers its information by surveying about 600 households. It asks detailed questions. The CCI surveys around 300 households. It uses fewer questions. Economists often view the MCSI as a better predictor of future spending. They see the CCI as a better reflection of feelings about the job market.

In April 2025, a notable gap appeared between these two indices. The MCSI was 33.8 points lower than the CCI. Such a large gap sometimes signals an oncoming economic recession. The CCI itself had decreased for four months in a row. It fell to 92.9 in March 2025. This marked a 17 percent drop since November 2024. An associated measure, the Expectations Index, hit a 12-year low. Concerns about rising prices and job security drove this decline.

These fears of a recession affected consumer behavior. About 70 percent of U.S. adults believed a recession was likely. In response, many people started to stay home more. They also chose to support local businesses. This behavior was similar to how people acted during the COVID-19 pandemic.

In Europe, consumer feelings were mixed. Half of surveyed consumers felt uncertain about the economy. About 24 percent expressed optimism. Another 24 percent showed pessimism. While inflation remained a concern, fewer European consumers named it their top worry. This dropped from 56 percent in the first quarter of 2024 to 47 percent in the first quarter of 2025.

Despite these low confidence levels in the U.S., actual consumer spending increased. While 53 percent of consumers expressed mixed or negative feelings, American households held a large amount of cash. This totaled $8.7 trillion. This amount was nearly double what they had before the COVID-19 pandemic. This financial cushion allowed consumers to keep spending even while they worried about the economy's future.

The Sentiment-Spending Gap: Exploring Why Negative Feelings Haven't Always Translated to Reduced Spending

A curious pattern emerged in 2025. Many consumers felt worried about the economy. Yet, they continued to spend money. This difference between feelings and actions is called the sentiment-spending gap.

In the U.S., about 53 percent of consumers reported mixed emotions or pessimism about the economy in 2025. Despite these feelings, they spent 9.8 percent more money than before the pandemic. This calculation even accounts for inflation. This shows a clear gap. People felt uneasy, but their wallets remained open.

Several economic indicators showed strength. The unemployment rate stood at 4.2 percent. Wages in the private sector had increased by over 25 percent since December 2019. These strong economic numbers likely supported spending. However, consumer worries were also present. The University of Michigan Consumer Sentiment Index reached its lowest point since 1978 back in June 2022. Rising inflation, which peaked at 7.8 percent in 2023, and high mortgage rates near 7 percent, fueled these concerns.

Globally, optimism levels varied. In South Africa, only 21 percent of people felt optimistic about their economy. In contrast, India reported 57 percent optimism. China showed 48 percent optimism. In the U.S., 61 percent of consumers said they cut back on spending in some ways. They looked for cheaper options or delayed large purchases. Grocery prices in 2025 were about 25 percent higher than pre-pandemic levels.

Spending priorities also shifted. While 20 percent of baby boomers said they intended to splurge, over half of millennials planned to spend on experiences. These included travel and jewelry. This highlighted a focus on value and experiences over just buying material goods.

Retailers adapted to these changes. Discount store chains like Aldi and Lidl did well. This was because 75 percent of consumers actively looked for less expensive alternatives. These stores emphasized quality and value. This matched what cautious shoppers wanted. Strong job stability also helped support continued spending, even with worries about rising prices and the stock market.

The luxury market showed some resilience too. In 2024, global spending on luxury goods and experiences reached €1.48 trillion. This was a slight decrease of 1 to 3 percent from 2023. Demand for luxury experiences, especially travel, remained strong. In the car market, new car sales increased by 6.4 percent. This indicated growth even amid cautious spending by consumers.

Economic data reflected this gap. A Leading Indicator, which tries to predict future economic activity, dropped to a reading of 54. However, a Roughly Coincident Indicator, which measures current economic conditions, stayed steady at 67. These figures suggested stable economic conditions, even as consumer sentiment weakened. Factors like low unemployment, stable inflation, and strong job growth helped keep consumer activity going.

Psychological Impacts: How Uncertainty Influences Decision-Making (e.g., Risk Aversion, Value Focus, Delaying Purchases)

Economic uncertainty reaches deep into people's minds. It changes how they think and make choices. This has several psychological impacts.

One impact is on risk perception. A study with 2,000 participants in Mexico found that people prefer known risks over unfamiliar ones. When faced with uncertainty, individuals with better thinking skills tend to make better decisions. The study showed that integrative complexity (thinking about issues from multiple perspectives) and syntactic complexity (using more complex language structures, indicating deeper thought) positively affected decision-making. These had coefficients of 0.1049 and 0.1884. Both results were highly certain.

Entrepreneurs also feel this pressure. A study of 179 self-employed people in Malta revealed how they coped. Using task-based strategies (focusing on solving problems) and avoidance-based strategies (distancing from stressors at times) helped their mental health. However, emotion-based coping (focusing on negative feelings) harmed their well-being. A supportive environment helps entrepreneurs make sound decisions.

Even high-income earners changed their financial behaviors. In January 2025, 52 percent of these individuals adopted a reactive approach to their finances. This means they reacted to events rather than planning proactively. This was up from 27 percent in February 2024. Rising inflation and the increased cost of living pushed these changes. This shows that economic strain affects even wealthy individuals.

Mental health issues have also risen due to ongoing economic and political uncertainty. Reports indicated a 25 percent global increase in anxiety and depression since the COVID-19 pandemic began. Chronic stress from economic strain can lower cognitive abilities. It can also increase the risk of mood disorders like depression.

Consumer behavior reflects these psychological shifts. A study with 255 online shoppers in China found that website performance influences purchase decisions. Better website quality accounted for 79 percent of the variations in people's intentions to buy. Consumers feel safer buying from reliable websites. This demonstrates how economic conditions shape buying choices, pushing people towards what feels secure.

A KPMG survey in 2025 found that 64 percent of Americans worried more about their finances than they did the previous year. This concern led 72 percent of consumers to plan cuts in their discretionary spending over the next three months. Discretionary spending is money spent on non-essential items. Canadians shared similar worries. About 53 percent of Canadians increased their emergency savings. People in both countries showed a clear trend towards prioritizing saving over spending.

The fashion industry also saw these effects. A BoF-McKinsey survey found only 20 percent of fashion leaders felt optimistic about the market. The need for value and affordability became more critical than ever. Retailers started to focus on essential items. They also offered value-driven products to adapt. The "value now" consumer prioritizes essential needs. They remain cautious about spending on non-essentials.

The Information Age: Media Influence and the Formation of Economic Expectations

In today's world, information travels fast. Media plays a large role in shaping how people view the economy. This influences their expectations and, consequently, their spending.

In 2025, research by McKinsey highlighted a puzzle. The U.S. unemployment rate was 4.2 percent in November 2024. Private sector wages had risen over 25 percent since December 2019. Yet, 53 percent of consumers felt pessimistic about the economy. This mixed feeling existed despite increased consumer spending compared to pre-pandemic levels. Media narratives can contribute to such disconnects.

Deloitte's Financial Well-Being Index showed a slight rise to 102.9 in March 2025. However, only 38 percent of global respondents expected their financial situation to improve in the coming year. A large majority, 76 percent, worried about rising prices. This fed their inflation concerns. These media-amplified worries shape how consumers feel and act with their money.

Generation Z, making up about 20 percent of the U.S. population, drives much of today's shopping. They spend over six hours daily on smartphones. They favor platforms like TikTok and Instagram. A notable 53 percent of Gen Z individuals use social media "buy" buttons. They also prefer brands that share their values. Businesses must understand these media habits to connect with younger consumers.

News coverage itself plays a critical role. A study analyzing 127,120 news articles found that negative news can distort public perceptions of the economy. For instance, a one-point positive increase in economic indicators could lead to 31 fewer articles reporting positive news. This negativity bias in media can make people feel worse about the economy than objective data might suggest. Currently, the International Monetary Fund (IMF) predicts a 40 percent chance of a U.S. recession in 2025. This is up from a 25 percent chance predicted earlier, and such forecasts receive wide media attention.

Concerns over inflation directly impact consumer sentiment. The University of Michigan’s Consumer Sentiment Index fell 11 percent to 50.8. This was its lowest point since the pandemic began. In a recent survey, 67 percent of people rated the government's performance on inflation poorly. Long-term inflation expectations rose from 4.1 percent to 4.4 percent. Many consumers adjust their spending habits out of caution fueled by these reports.

How information spreads also sways consumer behavior. Influencer marketing affects many buying decisions, especially among younger audiences. One study found that 76.14 percent of consumers responded positively to product recommendations from influencers. Meanwhile, around 84 percent of consumers admit to making impulse purchases. Social media often drives these spontaneous buying decisions.

Effective information flow is essential for shaping how people spend. In China, consumer awareness around broiler meat improved through positive messaging campaigns. A study showed that credible sources could raise understanding by 3 points. As global markets evolve, brands must use media wisely to influence and engage consumers.

Generational and Income Divides: Varying Responses to Economic Pressures

Different age groups and income levels experience economic pressures in unique ways. Their responses to these challenges also vary.

Generations in America face distinct economic landscapes. Baby Boomers, born after World War II, are increasingly returning to work. About 69 percent have done so, often in part-time roles, due to financial needs. Many feel their retirement savings are not enough. About 45 percent express this concern. Meanwhile, 57 percent of young adults currently live with their parents. This highlights financial strains across generations.

Generation X, born between the mid-1960s and early 1980s, shows practicality amid economic uncertainty. After the COVID-19 pandemic, 54 percent of Gen Xers worried about their retirement security. They often invest in 401(k) plans as traditional pensions decline. About 44 percent report work stress. Many balance caregiving for aging parents and their own children. This adds to their financial and emotional load.

Millennials, born from the early 1980s to the mid-1990s, are changing traditional work models. Many are influenced by the FIRE movement (Financial Independence, Retire Early). They prioritize saving for financial independence. They often take breaks from their careers to pursue sustainable living. Despite carrying high student debt, they use gig economy jobs to adapt.

Generation Z, born from the mid-1990s onward, emphasizes mental health and work-life balance. They seek personalized retirement paths. They often pursue entrepreneurial ventures to manage student debt. This generation looks to retire earlier than previous ones. They aim to mix work with leisure, challenging established job structures.

Income disparities also create large differences in how people experience the economy. By November 2024, inflation for lower-income U.S. households reached a cumulative 90 percent since a baseline period. For higher-income households, it was 74 percent. This created a 16-percentage point gap. The average annual inflation rate for lower-income households was 2.96 percent, compared to 2.54 percent for wealthier families. This means inflation hits poorer families harder.

In March 2025, 76 percent of all consumers reported worries about rising prices. Only 38 percent believed their financial situation would improve over the next year. This was down from 41 percent nine months earlier. Such concerns highlight the tough economic landscape, especially for lower-income groups.

In India, household spending patterns show this divide. On average, 44.6 percent of household spending goes towards food. For lower-income groups, this figure is 53.5 percent. Wealthier households, in contrast, allocate only 11.9 percent of their spending to food. This shows how basic needs consume a larger portion of poorer families' budgets. In Malaysia, rising household incomes benefit wealthier groups more than the bottom 40 percent (B40) of earners. The income growth of the B40 group trails behind wealthier households. This makes inflation a continuing challenge for them.

China faces similar issues. Household consumption growth was only 3.7 percent in early 2024. Many lower-income households carry debts averaging 145 percent of their income. Meanwhile, the top 10 percent of earners hold 60 to 65 percent of total savings. This stark income inequality limits overall consumption. India’s urban-rural divide further illustrates this. Urban households spend an average of ₹6,459 per month. Rural households spend only ₹3,773. The richest 5 percent in urban areas outspend the poorest 5 percent by 10.4 times.

High economic inequality influences consumer behavior. It can drive status consumption. People may buy luxury items for social signaling. This trend can lead to greater debt, complicating finances for lower-income households. Despite projected economic growth in India (6.5 to 6.7 percent for 2025-2026), and some retail sales growth in China (5 percent last year), consumer spending in China remains cautious. These divides shape how different groups experience and respond to economic pressures.

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Table of Contents

(Click on any section to start reading it)

I. Introduction: The Consumer in the Crosscurrents 

• Setting the Stage: The Modern Landscape of Economic Uncertainty 

• The Paradox: Why Consumer Spending Has Been More Resilient Than Expected 

• Defining Key Concepts: Inflation, Consumer Confidence, Discretionary vs. Essential Spending 

II. The Macroeconomic Backdrop: Forces Pressuring Consumer Wallets 

• Inflation's Grip: Tracking Price Increases Across Key Categories (Food, Energy, Housing) 

• The Role of Monetary Policy: Interest Rates, Borrowing Costs, and Access to Credit 

• Labor Market Dynamics: Employment Levels, Wage Growth, and Job Security Perceptions 

• Global Factors: Supply Chain Disruptions, Geopolitical Instability, and Tariff Impacts 

• Historical Context: Comparing Current Uncertainty to Past Economic Events (e.g., 2008 Crisis, Stagflation Periods)

III. The Consumer Mindset: Confidence, Sentiment, and Behavioral Shifts 

• Measuring the Mood: Understanding Consumer Confidence Indices (Conference Board, U. Michigan) and Recent Trends 

• The Sentiment-Spending Gap: Exploring Why Negative Feelings Haven't Always Translated to Reduced Spending 

• Psychological Impacts: How Uncertainty Influences Decision-Making (e.g., Risk Aversion, Value Focus, Delaying Purchases) 

• The Information Age: Media Influence and the Formation of Economic Expectations 

• Generational and Income Divides: Varying Responses to Economic Pressures

IV. Anatomy of Spending Shifts: Where the Money is (and Isn't) Going 

• The Squeeze on Essentials: Prioritizing Needs Amidst Rising Costs 

• The Discretionary Spending Spectrum: Cutbacks and Trade-Downs: Areas Facing Reduced Spending (e.g., certain retail goods, dining out) 

• Selective Splurging & Resilient Categories: Travel, Experiences, and "Little Treats" 

• The Quest for Value: The Rise of Discount Retailers, Private Labels, and Promotional Strategies 

• Channel Evolution: E-commerce Growth, Social Commerce Trends, and the Role of Brick-and-Mortar 

• Financial Health Check: Trends in Savings Rates, Debt Levels (Credit Cards, Loans), and Financial Vulnerability

V. Industry Focus: Sector Impacts and Business Strategies 

• Retail Realignment: Adapting to the Value-Conscious and Omni-Channel Shopper 

• Hospitality and Travel: Navigating Pent-Up Demand vs. Budget Constraints 

• Big-Ticket Items: Challenges in the Automotive, Housing, and Durables Markets 

• CPG and Grocers: Managing Inflation Pass-Through and Brand Loyalty 

• Strategic Adaptations: How Businesses Are Responding (Pricing, Marketing, Loyalty Programs, Supply Chain Adjustments, AI/Data Analytics)

VI. Looking Ahead: Future Outlook and Concluding Thoughts 

• Economic Scenarios for 2025 and Beyond: Potential Paths for Inflation, Growth, and Employment 

• Long-Term Behavioral Shifts: Will Current Trends Endure Post-Uncertainty? (e.g., Value Focus, Digital Adoption) 

• The Evolving Consumer Profile: Increased Intentionality, Focus on Value and Experience 

• Policy Implications: Potential Government and Central Bank Responses 

Baked with love,

Anna Eisenberg ❤️