As the 2024 presidential campaign gains momentum, Joe Biden has taken to the stage, delivering speeches on “Bidenomics” and highlighting the country’s economic performance under his presidency. In normal circumstances, this would be an opportune moment for him to make such a pitch. However, we are facing unprecedented times.
Unemployment has dropped to 3.6 percent, and the economy is still generating jobs, with hundreds of thousands added according to the latest report. Inflation is also cooling down, now at 3 percent. Despite high interest rates, home prices have remained stable. Furthermore, the stock market has already seen a rise of over 15 percent this year. Despite all these positive indicators, Americans remain surprisingly pessimistic about the state of the economy.
This pessimism is not new. In fact, after a brief moment of optimism in early 2021, economic gloom has prevailed throughout Biden’s presidency. According to the University of Michigan’s monthly survey on consumer sentiment, optimism plummeted from April 2021 to June 2022, reaching the lowest level in the survey’s 45-year history.
While sentiment has improved since then, it remains at historically low levels. In May, Americans felt even worse about the economy than they did in April 2009, during the height of the financial crisis. Trying to pinpoint a single reason for this perplexing pessimism is challenging. Instead, a combination of factors has contributed to Americans’ gloomy outlook.
The most apparent factor is inflation, which spiked at 8.3 percent in August 2022. Traditionally, both inflation and unemployment influenced people’s perception of the economy. However, since the onset of the pandemic, this relationship has changed. Inflation has negatively affected people as expected, but the substantial drop in unemployment has failed to boost their spirits.
Inflation has mattered not only because people dislike high prices but also because it has resulted in a decline in real wages for workers. According to economist Darren Grant, this decline is the primary reason for our economic pessimism. People feel financially worse off, and the drop in unemployment has not translated into higher real wages, leading to indifference towards the improved job market.
Although the decline in real wages since 2021 is a crucial part of the story, it does not entirely explain the situation. On average, real wages have remained relatively stable over the past three years, and stagnant wages have not always correlated with bleak sentiment in the past. Consumer sentiment has even risen during periods of flat wages, such as the 1990s and the early 2000s.
In recent months, real wages have started to rise as inflation has cooled down. Yet, consumer gloom persists, with consumers feeling worse than they have for over 90 percent of all months since the 1970s, according to JPMorgan Chase’s analysis.
So, what else is fueling this disaffection? The sharp decline in unemployment has not uplifted the national mood partly due to the misconception that the new jobs are merely a return of those lost during the pandemic. Paradoxically, the job boom itself has caused stress as stories about labor shortages abound and businesses struggling to hire demand more from their employees.
Another contributing factor is the disconnect between what is happening in the economy and what people are hearing in the news. The Michigan consumer survey from May revealed that respondents heard about unemployment twice as often as they did about hiring. One less-discussed reason for this is the struggles faced by industries that heavily influence public perception of the economy, such as finance, tech, and media.
Over the past year, the tech industry has witnessed numerous layoffs, even at prominent companies like Meta, Alphabet, and Microsoft. Media companies have been profoundly impacted by a decline in ad spending and the ongoing effects of streaming. Meanwhile, rising interest rates have caused disruptions in finance, leading to bank runs and slowing down dealmaking. These industry-specific issues have influenced professionals in these sectors, who often have an outsized role in shaping opinions and moods. Wall Street and academic economists have been predicting a recession for months, while tech enthusiasts on Twitter have been amplifying economic concerns, claiming that the numbers are much worse than they suggest. The financial media has generally adopted a gloomy stance and seems perpetually surprised by the ongoing strength of the job market.
To sum it up, while the reality of stagnant real wages plays a significant role in shaping people’s mood, this reality has been exacerbated by an overwhelmingly negative narrative about the state of the economy. This narrative has left Americans feeling worse than they have during similar economic times in the past. Despite these challenges, there are signs that the gloom may lift. Tech enthusiasts are feeling more optimistic, thanks to the AI boom and the Nasdaq rally. The stock market is generally performing well, and importantly, inflation rates are on the decline.
While the Federal Reserve’s commitment to combating inflation could potentially push the economy into a recession, there are indications that the negativity surrounding inflation may be subsiding.
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