Why economic surveys have lost their relevance

THE gross domestic product report on Thursday (Jul 30) is likely to show that economic growth in the US once again topped 2 per cent.

However, you would not have seen this coming in measures of the popular mood. Consumers keep spending, even as the gap between what they spend and the pessimism they express in surveys has never been higher.

Currently, the two main consumer surveys from global think tank The Conference Board and the University of Michigan reflect lows typical of a recession, not a steady expansion.

In fact, lower confidence readings have been registered only twice over the last three decades, including the global financial crisis of 2007 to 2008.

The same disconnect is visible in key measures of business confidence.

Several times since the pandemic, the Institute of Supply Management (ISM) surveys of manufacturers and service companies have signalled a recession, which never came.

The newer, broader business surveys from S&P have been closer to the mark, but despite a recent rebound, all these readings remain at levels weaker than the actual growth picture.

The monthly survey releases still get a lot of attention in the media and on Wall Street, which is a bit odd since the results are essentially broken.

Falling response rates distort their findings. Social media seems to breed discontent regardless of how fast the economy is growing.

In a polarised environment, partisan voters always think conditions are dismal when a rival party is in power. For these reasons and more, recent studies have found the reliability of major surveys falling not only in the US, but also the eurozone and UK.

Perhaps most significantly, surveys are naturally skewed by rising inequality.

Unlike aggregate GDP growth figures, surveys give equal weight to every respondent.

So they are never going to capture or foretell the full extent of GDP growth, when that growth is increasingly dependent on the spending of a few.

And that is what is happening now. In the US, the richest 10 per cent account for half of consumer spending, up from a third three decades ago. It should not be surprising the majority sounds pessimistic.

After widening for years, the political divide has also reached striking extremes.

By any measure, from inflation to unemployment, the US economy looks virtually the same this year under US President Donald Trump as it did in 2024, the last year under former president Joe Biden.

Yet, the share of voters who say the economy is in very or fairly good shape has dropped in that short span from 70 per cent to 5 per cent among Democrats, while rising from around 5 per cent to 70 per cent among Republicans.

Different perspectives from different segments

Since 2016, the tone of economic news has become “unmoored” from GDP growth and turned increasingly negative, which might help explain the persistent weakness in consumer sentiment, a Brookings Institution report showed.

At the same time, by hyping the lifestyles of the super-rich, social media has given almost everyone a reason to feel inadequate in comparison.

Then came a twist – in recent months, confidence began to rise among higher-income Americans as stocks hit new record highs, but it continued to fall among lower-income consumers worn down by higher inflation.

The share of consumers who say they are worse off due to inflation has surged since the pandemic from 10 to 40 per cent.

Business surveys are splintering as well. The major manufacturing surveys focus on large companies, which are better able to cope with the uncertainties generated by inflation than small ones.

Recently, as the spirits of large manufacturers somewhat recovered, surveys of small businesses showed a continued drop, mirroring the mood of lower-income consumers.

Before its recent uptick, the ISM survey was declining amid a bull market.

The fall is highly unusual and a misleading indicator. Even now, the manufacturing surveys are signalling market returns and earnings lower than the actual results.

The US Federal Reserve, too, has begun to doubt the forecasting value of surveys, given that – as former chair Jerome Powell put it – Americans keep expressing “downbeat” views on the economy, “then going out and buying a new car”.

This is more than a case of “bad vibes”, as some now describe it.

The pessimistic survey results reflect frustration with real flaws in a system that many see as stacked in favour of the richest people and largest companies.

So, until the system changes and creates a greater sense of fairness, surveys of economic sentiment will have little predictive power. FINANCIAL TIMES