This paper argues that political affiliation plays a central role in shaping household expectations and consumption behavior. Using survey and consumption data of U.S. households, we document five facts. First, household beliefs are well-described by a single factor “sentiment” model, with nearly identical factor structures regardless of political affiliation. Second, sentiment is highly persistent, with one exception: following changes in the White House, “optimists” become “pessimists” (and vice versa). Third, at any given time there is wide dispersion in sentiment across households, which is increasingly driven by political affiliation. Fourth, households have become more likely to justify their economic beliefs using partisan narratives; but outside of elections, the pass-through to sentiment is stable over time. Fifth, consumption responds differentially along party lines following changes in the White House. Standard theories of expectation formation struggle to simultaneously rationalize these facts.
