How consumer sentiment and expectations affect the economy

Consumers’ sentiment and expectations are important for forecasting how much Americans plan to save, spend, and invest in the stock market.

According to the survey’s director, Richard Curtin, one of the biggest reasons behind why Republicans are pessimistic are their concerns that the incoming US president, Joe Biden, will raise taxes on the wealthy and slow economic growth.

Consumer sentiment alone can have a huge economic impact. A newly released working paper from the National Bureau of Economic Research says that much of the US stock market’s V-shaped recovery during the Covid-19 can be attributed to changes in sentiment, driven by announcements from the Federal Reserve, rather than any underlying change in economic conditions.

Consumers who don’t have stock portfolios are still deeply affected by their economic sentiments and expectations. Feelings about the economy have a “statistically and economically significant” ability to predict consumer spending on various types of items according to Consumer Confidence and Consumer Spending, a paper by Sydney C. Ludvigson in the Journal of Economic Perspectives.

A new report from McKinsey also says Americans are planning to spend a lot less this holiday season, due to lower the lower consumer optimism driven by the Covid-19 pandemic. That will affect sales for retailers, taxes collected by governments, and jobs for store workers.

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