„DHe trembles „R's off” is a phrase that doesn't usually appear in rigorous economic analysis, but has cropped up again and again in serious debates about America in the past year. From an array of hard data, there's reason to think people should be more satisfied with the state of the economy: inflation is down sharply, gasoline prices are down, jobs are plentiful, incomes are rising, and the stock market is strong. But survey after survey suggests that Americans are actually very unhappy. They think the economy is in bad shape and that President Joe Biden is mismanaging it. What gives?
Start with Source of Darkness. The University of Michigan's consumer-sentiment index is closely watched by economists for an idea of what people are feeling. Over the past two years, it has jumped to levels last seen during the 2007-09 global financial crisis. Even with an improvement in December, it remains 30% below its recent peak before the Covid-19 crisis in early 2020.
Many other polls also fell flat. Every week since 2009 Economist/YouGov poll asked about 1,500 Americans to rate the economy: Nearly half think it's getting worse now, up from a third in the decade before Covid. Questions that focus on Mr. Biden's record are even less exciting: Two-thirds of respondents to a Gallup poll in November disapproved of his handling of the economy. All this despite the fact that America has been outpacing its larger, developed peers in the last few years.
The fact that many Americans are so pessimistic about such a strong economy has created a cottage industry of theories. A first batch argues that they have every right to feel squeamish: some statistics that matter most to their pocketbooks aren't so happy. Inflation has reduced their wages. Controlling for consumer prices (a common measure of inflation), the median income of private sector workers is essentially at the same level as in February 2020, pre-Covid strike.
More recent fundamentals are even less flattering. While some Americans want to go back to the world of Covid shutdowns, many benefited greatly from government spending during that time. After-tax personal income is now about 15% lower than in March 2021, buoyed by a massive stimulus package passed by Democrats soon after Mr Biden took office. Another incongruous comparison to the recent past: The aggressive interest rate hikes needed to control inflation have made loans for homes and cars more expensive. Housing affordability hit its lowest level in decades last year, making Mr Biden an easy target for critics. Bidenomics is „pricing millions out of the American dream,” says the Republican National Committee.
Still, as the Biden administration is so keen to point out, there is much to like about the current economy. The alleged stagnation in private sector wages is actually a statistical illusion due to the upward bias in the consumer price index. Use the Federal Reserve's targeted per-capita-consumption-expenditure index as a better alternative—and real wages will be on their pre-pandemic trend. At 3.7%, the unemployment rate is the lowest in five decades. Wage growth has been particularly strong for low-income Americans. The S&P The leading U.S. stock index 500 is flirting with record highs.
From a range of indicators—good and bad—Americans appear unduly pessimistic. Ryan Cummings and Neil Mahoney, two economists who previously worked in the Biden White House, developed a simple model to predict consumer-sentiment index levels based on inflation, unemployment and consumption data and stock market performance. Their conclusion is that the index is 20% lower than where the data suggests. Other models have found a similar discrepancy.
This suggests a second type of explanation: opinion polls and sentiment polls may have negative biases. Deep partisan animosity is undoubtedly a factor. In their study, Messrs. Cummings and Mahoney calculate that Republican hostility toward a Democratic-controlled White House may account for about 30% of today's sentiment gap.
Another aspect may be the tone of the news package. Ben Harris and Aaron Sojourner of the Brookings Institution, a think tank, examined the relationship between economic data and an index of economic news sentiment. From 2021, the news-sentiment index is worse than expected from the data, as is the consumer-sentiment index. And that might just be scratching the surface. The news-sentiment index, developed by the Federal Reserve branch in San Francisco, is based on economic articles in major U.S. newspapers. Throw in the vitriol that goes viral on social media platforms, and the negative bias can be even greater.
A final explanation is that there may be a long lag between post-pandemic recovery and sentiment about the economy. This is a superficial period. The intense uncertainty of the Covid years, such as job losses, school closings, bankruptcies and illness, has affected people. Many are still upset by the fierce battle with inflation. Although inflation has moderated, prices are nearly 20% higher than when Mr. Biden took office. The sticker-shock takes some getting used to. Messrs Cummings and Mahoney estimate that a 10% rise in inflation lowers consumer sentiment by 35 index points in the year in which it occurs, 16 points in the following year, and eight points in the year after that.
If a similar timeline were in effect now, Americans might be halfway to accepting their new high-cost reality. It also helps that real income growth has accelerated over the past year, allowing them to regain their lost purchasing power. The consumer-sentiment index was volatile, but it clearly bottomed out in mid-2022—around the peak of inflation—and posted a solid rise in December, albeit low by historical standards.
„If we can continue to maintain a tight labor market while taming inflation and delivering real wage gains, our theory is that the recipe should show improved sentiment. We think we're starting to see that,” says Jared Bernstein, chairman of the White House Council of Economic Advisers. The vibrations, in other words, can pick up. ■
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