In the realm of rigorous economic analysis, the phrase "the vibes are off" may seem out of place, but it encapsulates a prevailing sentiment in discussions about America over the past year. Despite encouraging economic indicators—slowed inflation, lower petrol prices, ample job opportunities, rising incomes, and a robust stock market—survey after survey suggests that Americans are notably dissatisfied. The question is, why?
The Gloom Perception
Consumer sentiment, a key metric closely watched by economists, as measured by the University of Michigan, has remained persistently low over the past two years. Even with a modest improvement in December, it lingers 30% below its pre-COVID peak. Various surveys echo this gloom, with a substantial portion of Americans expressing pessimism about the economy and disapproval of President Joe Biden's handling of it.
The Case for Economic Discontent
One perspective attributes this widespread discontent to economic realities that directly impact individuals. Inflation has eroded wages, with average earnings for private-sector workers essentially stagnant since February 2020 when COVID struck. Recent baseline comparisons reveal a decline in after-tax personal income, and the aggressive interest-rate hikes aimed at controlling inflation have made loans more expensive, particularly for housing. The resultant decline in housing affordability has become a focal point for critics of the Biden administration.
The Biden Administration's Counterarguments
The Biden administration contends that there are positive aspects to the current economy that counterbalance the perceived stagnation. They argue that the apparent wage stagnation is a statistical illusion caused by the upward bias in the consumer-price index. Using a more accurate measure—the personal-consumption expenditures index targeted by the Federal Reserve—real wages align with pre-pandemic trends. Additionally, with a 3.7% unemployment rate and robust wage growth, especially for low-income Americans, the economy exhibits strength. The S&P 500, reaching record highs, adds to the positive narrative.
Unraveling the Discrepancy
Economists Ryan Cummings and Neale Mahoney, former Biden White House members, created a model that predicts consumer sentiment levels based on various economic indicators. Their conclusion indicates that the sentiment index is about 20% lower than expected, a discrepancy found in other models as well.
Exploring Explanations: Partisanship, News Coverage, and a Lag Effect
Partisan bias plays a role, with Republican antipathy towards a Democrat-controlled White House accounting for a significant portion of the sentiment gap. News coverage also contributes, as studies show a negative bias in economic news sentiment since 2021. Additionally, there may be a long lag between the post-pandemic recovery and public perceptions, influenced by the uncertainties and challenges faced during the COVID era.
A Glimmer of Optimism
As the economy progresses, real-income growth accelerates, and inflation moderates, Americans might be gradually adapting to their new economic reality. The consumer-sentiment index, though volatile, has shown signs of improvement, reaching a low point in mid-2022 and rising in December. Jared Bernstein, chair of the White House Council of Economic Advisers, expresses optimism, stating that maintaining a tight labor market while easing inflation and delivering real wage gains could positively impact sentiment.
In essence, the disconnect between positive economic indicators and public sentiment remains a complex puzzle, with various factors at play. Whether it's the lingering effects of the pandemic, partisan influences, or a delayed response to economic improvements, the evolving narrative of America's economic perception will undoubtedly continue to shape discussions and policies in the coming months.
