In new NBER paper with @MA_Bolhuis, @juddcramer and Oskar Shulz, we argue that the unprecedented increase in borrowing costs is crucial to explaining the low consumer sentiment of the last two years. 1/N
https://t.co/4CF4xVTlHv

— Lawrence H. Summers (@LHSummers) February 27, 2024

Since Okun invented his misery index in the 1970s, economists have looked at unemployment and the inflation rate to gauge consumer sentiment. But now that unemployment is low and inflation has declined, consumer sentiment remains depressed. 3/N pic.twitter.com/1dMh4GvVxT

— Lawrence H. Summers (@LHSummers) February 27, 2024

In the paper, we show that the variation in the current University of Michigan Index of Consumer Sentiment, which cannot be explained by official inflation and unemployment, has historically shown a strong correlation with proxies for borrowing costs. 5/N pic.twitter.com/DnA0oMXlLx

— Lawrence H. Summers (@LHSummers) February 27, 2024

We then develop alternative CPI measures that explicitly incorporate the cost of money. The CPI does not only exclude mortgage costs, but also personal interest payments, which increased by more than 50 percent in 2023. 7/N pic.twitter.com/pa8qAlerqv

— Lawrence H. Summers (@LHSummers) February 27, 2024

We also show the sentiment gap in 2023 was not only a U.S. phenomenon as rates have jumped around the world. Overall, our paper highlights how consumers care about the cost of money, with potential for consumer sentiment to rise significantly if and when interest rates decline.…

— Lawrence H. Summers (@LHSummers) February 27, 2024