If President Biden fails to win re-election, a crucial factor will be the widespread perception of a struggling economy under his leadership. Numerous polls consistently reveal that Americans consider the economic conditions to be very poor and have given Biden low approval ratings for his handling of the economy.
Oddly enough, these negative ratings persist despite the fact that, by all conventional measures, the economy is actually performing extremely well. We have recently experienced what Goldman Sachs refers to as a “soft landing summer,” with inflation dropping by almost two-thirds since its peak in June 2022. This remarkable improvement has occurred without the projected recession and significant job losses that many economists had predicted. Real wages, especially for nonsupervisory workers, are also substantially higher than pre-pandemic levels.
Contrary to popular belief, these figures include food and energy prices. While the government does calculate measures of “core” inflation that exclude these prices for analytical and policy purposes, the overall economic indicators are still positive.
So, why are people so pessimistic about an economy that is performing exceptionally well?
When I first began discussing the disconnect between public perceptions of the economy and its actual state, I faced significant resistance that can be categorized into two main arguments.
Firstly, some argue that there are genuine economic problems that justify the negative sentiment. People strongly dislike inflation, even if their incomes are keeping up, and a year ago, real wages were still somewhat depressed. However, at present, inflation is considerably lower, and real wages have increased.
Secondly, there is the argument that customer satisfaction is paramount. If people feel that they are doing poorly economically, it is essential to understand the reasons behind their perception instead of lecturing them about feeling better.
However, there is substantial evidence suggesting that people do not personally feel economically disadvantaged. Surveys and consumer behavior indicate that while most Americans believe they are doing fine personally, they hold a negative view of the economy, likely referring to others’ economic situations.
Let’s examine some of this evidence.
The Federal Reserve conducts an annual survey on the economic well-being of households. At the end of 2022, 73 percent of households reported being “at least doing OK financially,” a slight decline from the previous year due to the cessation of several pandemic aid programs but not significantly lower than the 2019 figure. However, in 2019, 50 percent of the population perceived the national economy as good or excellent, while in 2022, this number dropped to just 18 percent.
Are people still doing fine? Consumer spending has remained robust, indicating that American families are not overly concerned about their financial situation.
What about inflation? According to a recent poll by The Wall Street Journal, 74 percent of Americans believe that inflation has worsened over the past year, a result that starkly contrasts with the data showing a significant decrease in inflation. However, are people truly experiencing rising inflation?
Interestingly, various organizations regularly survey consumers about their inflation expectations, and these expectations have significantly declined, contradicting claims of worsening inflation.
Moreover, surveys that directly ask businesses about their own prices or costs provide even stronger evidence. The National Federation of Independent Business queries small-business owners on whether they have increased or reduced prices in the past three months. While more businesses are raising prices than lowering them, this difference is much smaller than the previous year. The Federal Reserve Bank of Atlanta inquires about businesses’ expectations for cost increases in the next year, with the median response at 2.5 percent, down from 3.8 percent last year.
Hence, when people are surveyed about their own experiences rather than “the economy,” their views on inflation align with the official data showing significant improvement.
In conclusion, there is undoubtedly a significant gap between Americans’ perception of the economy and actual reality. This disconnect cannot be denied, as it is not only evident in official data but also in people’s own experiences.
What explains this negativity in a thriving economy? Partisanship likely plays a role, with Republicans’ assessment of the current economy closely resembling their view in June 1980 when unemployment was twice as high, and inflation was four times higher than it is now. Additionally, recent events such as inflation, higher interest rates, the disruptive impact of COVID-19, and a sense of political disunity in America may have contributed to a general feeling of discontent and a refusal to acknowledge positive news when it arises.
Now, officials in the Biden administration are actively promoting their economic achievements, as they should. However, it is uncertain whether public opinion will change. We currently exist in a world where beliefs may have little correlation with facts, including one’s own life experiences.
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