“handhe has a vibe The phrase “off” doesn’t usually appear in rigorous economic analysis, but it has cropped up numerous times over the past year in serious discussions about America. There is reason to think, based on a set of hard data, that people should be pretty satisfied about the state of the economy. That means inflation is slowing sharply, gas prices are low, jobs are plentiful, incomes are rising, and the stock market is strong. But survey after survey suggests that Americans are actually quite unhappy. They think the economy is in bad shape and that President Joe Biden is mismanaging the economy. What gives?
Let’s start with the evidence of depression. The number that economists look to most to understand how people are feeling is the University of Michigan’s Consumer Sentiment Index. Over the past two years, it has rebounded to levels last seen during the 2007-2009 global financial crisis. Even with an improvement in December, it is still 30% below its recent peak on the eve of the coronavirus crisis in early 2020.
Many other surveys have similarly slumped. weekly since 2009 economist/YouGov poll asked about 1,500 Americans how they feel about the economy and found that almost half now think the economy is getting worse, up from about a third in the pre-pandemic decade. It has increased. Enthusiasm dwindled further when questions focused on Mr. Biden’s record, with two-thirds of respondents in a November Gallup poll disapproving of Mr. Biden’s handling of the economy. And all this despite the fact that the United States has outgrown large developed countries over the past few years.
The fact that so many Americans are disappointed in such a strong economy has given rise to a cottage industry of theories. The first group claims that they have a right to feel depressed. Some of the numbers that matter most to their wallets are just not so rosy. Inflation has reduced their wages. Adjusting for consumer prices (one common measure of inflation), average income for private sector workers remains essentially the same as it was in February 2020, just before the coronavirus outbreak. There is.
The baseline these days is even less flattering. Few Americans would want to return to a world of government shutdowns due to the coronavirus, but many benefited greatly from increased government spending at the time. After-tax personal income is now about 15% lower than it was in March 2021, when it was supported by the massive stimulus package passed by Democrats shortly after Biden took office. Another unseemly comparison with the recent past is that the aggressive interest rate increases needed to keep inflation in check have made home and car loans much more expensive. Last year, home prices hit their lowest levels in decades, making the country an easy target for Biden’s critics. The Republican National Committee says Bidennomics is “pushing millions away from the American Dream.”
But as the Biden administration is all too keen to point out, there is much to like about the current economy. The supposed stagnation of private sector wages is actually a statistical illusion caused by the upward bias in the consumer price index. A better alternative, the Federal Reserve’s targeted index of personal consumption expenditures, would bring real wages closer to pre-pandemic trends. The unemployment rate is 3.7%, just above the lowest level in 50 years. Wage growth was particularly strong for low-income Americans.of S&P The major US stock index, the 500, is at a new all-time high.
Judging by a variety of indicators (both good and bad), Americans appear to be overly pessimistic. Ryan Cummings and Neil Mahoney, two economists who previously worked for President Biden, used data on inflation, unemployment, and consumption, as well as stock market performance, to determine the level of consumer confidence. We created a simple model to make predictions. Their conclusion was that the index was about 20% lower than the data should indicate. Similar discrepancies were found for other models.
This suggests a second category of explanation: that public opinion polls and sentiment surveys may have a negative bias. There is no doubt that deep-seated hostility between factions is a contributing factor. In their study, Cummings and Mahoney calculated that Republican antipathy toward a Democratic-controlled White House may account for about 30% of today’s sentiment gap.
Another factor may be the tone of news coverage. Ben Harris and Aaron Sojourner of the Brookings Institution think tank studied the relationship between economic data and economic news sentiment indicators. Starting in 2021, the News Sentiment Index, as well as the Consumer Sentiment Index, deteriorated significantly more than what would be expected from the data. And that may just be scratching the surface. The News Sentiment Index is produced by the San Francisco branch of the Federal Reserve Board and is based on economic articles from major American newspapers. Throw in the vitriol that tends to spread on social media platforms, and negative bias can become even more pronounced.
A final explanation is that there may simply be a long lag between post-pandemic recovery and sentiment about the economy. It was a hectic period. The extreme uncertainty of the coronavirus pandemic (unemployment, school closures, bankruptcies, disease) has taken a toll on people. Many people are still reeling from the disastrous battle against inflation. Although inflation has slowed, prices are still nearly 20% higher than when Biden took office. Sticker shock takes some getting used to. Mr. Cummings and Mr. Mahoney estimate that a 10% spike in inflation would reduce consumer sentiment by 35 index points in one year, 16 points the following year, and 8 points the year after that.
If a similar timeline were currently underway, Americans would probably be halfway toward accepting a new, more expensive reality. Real income growth has also accelerated over the past year, allowing us to regain some of our lost purchasing power. Consumer confidence has been volatile, but it clearly bottomed out in mid-2022, right around the peak of inflation, and continued to post solid gains in December, although it remains low by historical standards. .
“Our theory is that if you can keep the labor market tight while reducing inflation and increasing real wages, the recipe should show up in improved sentiment. And I think we’re starting to see that.” said Jared Bernstein, chairman of the White House Council of Economic Advisers. In other words, the atmosphere may be growing. ■