Americans Say They're Broke. Then They Buy Stuff Anyway.

Americans feel terrible about the economy. The University of Michigan's Consumer Sentiment Index hit 56.6 in February — a 12-year low. That's 33% below the historical average.

And yet they're still spending.

Consumer expenditures rose 2.4% in the fourth quarter of 2025. Retail sales held steady through the holidays. The math doesn't work. People who say they're broke are buying like they're rich.

Economists call it the "sentiment schism." KPMG surveyed 1,100 Americans and found 54% were optimistic about their own finances but only 37% about the national economy. It's the same pattern everywhere — "I'm doing okay, but everyone else is screwed."

Here's the problem: the Federal Reserve uses consumer sentiment to set interest rate policy. If sentiment tanks, the Fed assumes spending will follow. Historically, it did. Not anymore.

A Federal Reserve study found the relationship between sentiment and spending has collapsed. Capital Economics calls it "weak in recent years." The old rules don't apply.

So what changed?

Three things broke the model.

First: cumulative inflation. Prices feel high even as inflation slows. Eggs cost more than they did three years ago. Your brain remembers what they used to cost, not what the inflation rate is today. The sentiment surveys measure that cumulative sting. Second: wealth inequality. NPR reported Delta Air Lines will earn more from first class than economy for the first time ever in 2026. The rich are spending because the stock market's booming. The poor are pulling back because wages aren't keeping up. Average it out and spending looks steady. But it's not — it's bifurcated. Third: coping mechanisms. McKinsey found an "intriguing paradox" — consumers most worried about finances were more likely to report plans to splurge. Treat yourself becomes a response to stress, not a sign of confidence.

The Conference Board's Consumer Confidence Index dropped to 84.5 in January — the steepest fall in four years. The expectation was for spending to crater. It didn't.

If people feel broke but spend anyway, what are we measuring? Not economics — mood.

Sentiment surveys ask "do you think the economy is good?" That's psychology. It's vibes. The Fed treats it like a spending forecast. But if vibes and wallets don't move together anymore, the forecast's broken.

Three scenarios from here:

One: Sentiment eventually catches up to behavior. People keep spending until they stop, and by the time they stop it's too late for the Fed to react. Two: Behavior catches up to sentiment. The pessimism is real, just delayed. Spending finally collapses and drags the economy with it. Three: We're already in a new regime where sentiment and spending are permanently decoupled. The indicators we've relied on since the 1960s just don't work anymore.

Right now we're betting on number three. That's a gamble. Because if it's number one or two, the Fed's flying blind.