Consumers drive the U.S. economy, two-thirds of which is made up by their spending. So understanding how consumers feel about the economy, and their expectations for it, can tell an interesting story about what’s to come.

Measures like the University of Michigan’s Index of Consumer Sentiment and The Conference Board’s Consumer Confidence Index try to capture these feelings by surveying people across the country about their financial situations and perceptions of the economy. Lately, though, people have been feeling pretty down about the economy, according to these measures, despite fairly upbeat data that shows inflation easing and gross domestic product growing.

To better understand these sentiment measures and the apparent disconnect between consumer feelings and what’s happening in the economy, “Marketplace” host Kai Ryssdal spoke with professor Sasha Indarte at the University of Pennsylvania’s Wharton School and professor Karthik Sastry at Princeton.

Below is an edited transcript of their conversation.

Kai Ryssdal: Why do we measure these things? Because honestly, it’s a little squishy, right? They’re about feelings, and economics is nominally a science, right?

Sasha Indarte: That’s right. So, one of the big goals of measuring consumer sentiment and consumer confidence is to understand how people perceive both current economic conditions and also get a sense of their expectations about future economic conditions. Those two things are the fundamental determinants of how people are going to behave today. For example, do I have the resources I need and the money available to spend to make a big-ticket purchase like a refrigerator, or am I worried about saving? Am I worried that there’s a greater risk of losing my job in the next year? And maybe that’s something that would make me postpone making those kinds of expenditures. So, the short answer is that sentiment and confidence are very importantly and significantly related to people’s actual behavior and decisions.

Karthik Sastry: It’s really interesting because you mentioned there’s so much hard data about the economy, right, so why are the soft data useful? Well, in times of crisis, like after the stock market bust in 2001, and also in 2008 and 2009, we actually saw that the consumer confidence indices may have given a better real-time picture of how the economy really seemed to people. So, it was of great benefit to policymakers and decision-makers in those times.

Ryssdal: All of which I get, professor Indarte, but riddle me this — is it not possible that consumers can be wrong? If you went outside on Figueroa Street, right outside my office, and asked 10 people, probably eight of them would say the economy is terrible right now, when in point of fact, it’s actually pretty good.

Indarte: It’s very possible that people have incorrect perceptions. For example, when it comes to things like inflation, this is something that people persistently overestimate. Now, people may make incorrect predictions, but what they believe, whether it’s going to turn out to be right or wrong, is influencing their behavior. So, knowing what they believe is still ultimately going to be helpful for predicting actions. And then you can also get self-fulfilling phenomena where people believe things are going to be good in the future, so you invest more, you spend more, and then you might, in effect, make it actually true.

Ryssdal: Well, so let’s riff on that for a little bit. Professor Sastry, because, as you know, a recession has been predicted to be six months away for something like two years now. And so, consumers have been a little nervous, corporate America has definitely been nervous and they’re looking at what consumers are doing. So again, it kind of matters macroeconomically that consumers have an accurate perception.

Sastry: Absolutely. And I actually also want to take this opportunity to dig into one slightly more subtle pattern in the data that really seems like it’s popped out over the last six to 12 months, which is within these confidence indices, they ask a number of more specific questions about how people think their own financial situation looks. That’s the focus of some questions, and others are about the economy writ large. And one pattern in the Michigan survey is that the answers about one’s own financial situation look a little bit better recovered than people’s perceptions about the economy overall. And I think that’s an interesting gap. It doesn’t show up so much as starkly in historical data, and that might have some clues about both economic mood and the political mood right now.

Ryssdal: So put 2 and 2 together for us. I mean, you literally wrote a paper on the importance of narratives in economic forecasting and prospects. So, what does it mean to you that we see these things?

Sastry: That’s right. Some of the work that I have done has been about testing these hypotheses that waves of optimism and pessimism drive what’s going on in the economy and whether there’s evidence that they can be self-fulfilling. I think my suspicion is that for economic decisions, what households say about their own situation is a little bit more important. And I think that’s a statistical fact. But it also comes a bit from self-reflection, that people’s decisions about whether to go in for a new house or a car really depend a lot on what they think will happen with their own income and the buying conditions in their local communities and a little bit less to do with how people answer questions about the overall economy. So, I am cautiously optimistic because a lot of the narrower questions about how people assess their own situation don’t look as pessimistic.

Indarte: Yeah, and I can add a couple of data points on to what Karthik mentioned, as well, on the side of the broader economy and how people feel about that. So, there’s prior research, for example by Amir Sufi and co-authors, that has shown that people’s perceptions about the economy very much are predicted by whether their team is in the White House. So, if you’re a Democrat and there’s a Democratic president, you tend to be more optimistic about the economy. So, this would be a conjecture, but we’re in a time where there’s more polarization. And this is something that could make people really focus more on who is in the White House and what that might mean for the broader economy. And there might be more of this disconnect between individual circumstances and the macroeconomy.

Ryssdal: Marketplace did a survey a number of years ago before the pandemic, which was based on what party was in the White House, and that affected how they trust the actual economic data, which is, you know, challenging. It’s troubling if you have this objective data coming out, and people are just choosing not to believe it because of which team is in the White House. Quickly, why doesn’t the government measure this? Why is it Michigan and The Conference Board?

Indarte: So I think one reason why the government isn’t nowadays involved in the measurement of this, which wasn’t necessarily always true in the past, is that it might just be really hard to believe.

Ryssdal: So that gets to the feelings part of this, right? It’s the qualitative thing versus the actual hard numbers thing.

Indarte: Yes. I think the qualitative aspect of it makes it harder. It’s one thing to see, you know, what have sales been at my firm. But how are my customers feeling? That’s a lot harder to measure.