There’s a disconnect between consumer sentiment and spending

The “vibecession” remains in effect, according to recent data, just as it has over the past few years. This term refers to the gap between consumer sentiment (sometimes referred to as “soft data”), which has been quite negative, and “hard data” (for instance, consumer spending, employment reports and economic growth), which has been more favorable.

Bankrate’s recent Discretionary Spending Survey captured numbers that fit right into the trend. The mood is down: 54 percent of U.S. adults say they expect spend less on travel, dining or live entertainment this year than they did in 2024. But it’s important to watch what people do, not just what they say. And what they’re doing — well, those numbers don’t add up to what they’re saying.

Have a question about credit cards? E-mail me at ted.rossman@bankrate.com and I’d be happy to help.

Ted Rossman is a senior industry analyst at Bankrate. He focuses on the credit card industry and helps consumers maximize rewards, get out of debt and improve their credit scores.

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What’s causing this vibecession?

Consumer sentiment has been depressed ever since the COVID-19 pandemic began in 2020, according to the University of Michigan’s popular Index of Consumer Sentiment which has been published for nearly 50 years. It notched an all-time low in June 2022 when inflation peaked, then it recovered a bit only to retest the bottom this spring due to tariff fears.

Inflation

High prices are the problem — at least from a sentiment standpoint. Even though the unemployment rate was extraordinarily low throughout 2022 and 2023 (it’s still pretty low today), and even though wage growth has outpaced inflation for the past few years, Americans don’t feel like they’re getting ahead or even able to catch up with all the price hikes of 2021 and 2022. Bankrate’s latest Wage to Inflation Index, published in September 2024, revealed that prices had risen an average of 20 percent from January 2021 to the end of June 2024, while wages were up an average of 17 percent. It’s the cumulative effect that’s a pain. The inflation rate isn’t so bad now, but it’s building on top of significant price hikes that workers haven’t fully overcome.

The inflation rate has continued to fall this year, although the cumulative effect remains significant. Many consumers are hoping that costs will go back to where they were in 2019, prior to the pandemic and the related supply chain disruptions which fueled the inflation surge we endured in 2021 and 2022. Of course, lower inflation means that prices are still growing, they’re just growing more slowly. Falling prices are generally loathed by economists as a sign of a flailing economy. The primary objectives for the Federal Reserve are to promote stable prices (generally understood to mean an inflation rate around 2 percent) and maximum employment.

In some individual categories, prices have actually decreased over the past year, notably in the travel sector. Airline fares have fallen 8 percent, according to the latest Consumer Price Index. Car and truck rental prices are down 2 percent, as are hotel and motel costs. Gasoline is down a whopping 12 percent. This may be promoting the perception that people are spending less on travel.

All news is local

It’s also important to note that individual experiences don’t always reflect macro trends. Economic inequality continues to grow, and, sadly, many households are struggling. The top 10 percent of earners drive 50 percent of U.S. consumer spending, according to Moody’s Analytics. This helps explain why the economy and consumer spending can expand even as many cut back.

Young adults are YOLO-ing

Another theory is that consumer sentiment isn’t as predictive as it used to be. People are saying one thing and doing another in part because of the “you only live once” (YOLO) attitude that intensified during and after the pandemic. There are other trendy names that experts have applied to this trend, such as “revenge spending” and “doom spending.”

Some Americans, especially young adults, are throwing caution to the wind, taking trips and going to restaurants, music festivals and sporting events despite feeling uneasy about their finances. Sometimes it’s even a conscious act of rebellion, with these 20- and 30-somethings saying that their prospects to buy a home, pay off student debt and afford childcare are pretty bleak, but at least they can have fun.

For instance, most Coachella attendees financed their tickets with buy now, pay later plans. And Bankrate found that 39 percent of Gen Zers and 37 percent of millennials are willing to take on debt for travel, dining or live entertainment this year, compared with 31 percent of Gen Xers and 21 percent of baby boomers. That’s worrisome at a time when the average credit card rate is a near-record 20.12 percent.

Climbing the wall of worry

There’s a ton of uncertainty regarding the economy right now, but one thing is clear: People aren’t feeling great about things. Led by concerns about the inflation we’ve dealt with the past few years and the possibility that tariffs will make it worse, if you ask people how the economy is doing, most say it’s pretty bad. Yet they’re still spending anyway, and consumer spending powers roughly two-thirds of economic activity.

The strange part is that, when people get nervous about the economy, the first places they tend to cut back are extras such as travel and dining (at least traditionally). There’s a big difference, of course, between spending more because you have to (because housing, groceries and medical care have become more expensive) and spending more because you want to.

The bottom line

Right now, at least in the aggregate, people are spending more on just about everything. And discretionary categories such as dining and live entertainment are growing faster than most. Some of this is surely because higher earners are propping up the overall numbers. Plus, the job market remains solid, which is enabling people to spend. But don’t underestimate the post-pandemic “YOLO” trend. It still seems to have room to run. Many Americans are climbing the wall of worry and spending on fun experiences that make them feel good.

It’s always dangerous to say “this time is different,” but it seems that a fundamental change has occurred and Gen Zers and millennials, in particular, are prioritizing spending on experiences even if that means taking on debt or delaying traditional milestones such as marriage, homeownership and having children.