The U.S. Consumer: Confidence vs Activity

March retail sales highlighted the growing disconnect between consumer confidence and consumer behavior. Retail sales surged 1.7% month over month, following a revised 0.7% gain in February, marking the strongest monthly increase in more than three years. But of that 170 basis point jump, roughly 110 of it came from higher energy prices—specifically, gas station sales jumping a whopping 15.5%. So is consumer demand still healthy, or are prices just going up? Let’s look closer. 

On the positive side, spending resilience extended to other retail sectors as well. Excluding miscellaneous store retailers, all major retail categories posted gains, suggesting households continued to spend despite rising costs. 

However, this persistence contrasts sharply with confidence indicators. The University of Michigan consumer sentiment index has fallen to historically low levels, driven by concerns around inflation, energy prices, and broader uncertainty.

The divergence suggests confidence is deteriorating faster than actual demand. Consumer sentiment has traditionally been viewed as a leading indicator, with lower readings signaling a pullback in discretionary spending as households prioritize caution over consumption. In recent years, however, sentiment has persistently underperformed relative to hard consumer data, like retail sales. 

That said, cracks in the consumer may be forming beneath the surface. Discretionary categories such as apparel and restaurants posted flat or slower growth than in February, hinting at emerging spending tradeoffs. For markets, the key question is whether weak confidence remains a reliable warning signal. 

Julia Rozenfeld contributed to this article.