Originally published at Project-Syndicate | Feb 22nd, 2024
At least six reasons have been advanced to explain the apparent disconnect between US economic indicators and public-opinion surveys. While some are clearly wrong, others – in particular, the idea that perceptions are simply lagging behind reality – are convincing.
CAMBRIDGE – The United States is in unusually good economic shape nowadays – no recession in sight. But it seems to be enduring a “vibecession”: public-opinion surveys show broad dissatisfaction with the economy and US President Joe Biden’s stewardship. What explains this disconnect between performance and perception? At least six answers – some far more credible than others – have been advanced.
The first is that there is no disconnect at all; the positive economic indicators are wrong or misleading, and the true state of the US economy is as poor as public opinion indicates. This explanation is simply wrong. While any given number can be subject to measurement error, a wide variety of statistics – covering economic growth, labor-market strength (jobs created or unemployment), and inflation (consumer price index or personal consumption expenditures, either headline or core) – have been collected, largely separately. And they overwhelmingly paint a very positive picture.
The second possible explanation – offered by economist Paul Krugman and others – is that the negative survey results reflect Republican partisanship. Though one might assume that Democrats and Republicans are equally partisan, Republican poll respondents actually tend to be much more heavily influenced by which party controls the White House. When Republican Donald Trump succeeded Democrat Barack Obama, Republicans were suddenly reporting far higher satisfaction with the economy. When Democrat Biden took over, they again became fixated on the supposed economic deprivation of American households. Poll responses by Democrats tend to follow economic indicators more closely.
The third explanation emphasizes news media’s tendency to focus on the negative. Increases in gasoline prices can be headline news, but decreases are unlikely to make the front page. Forecasters predicting an imminent recession – as many did in 2022 – get far more attention from journalists than those who disagree. On social media, a post containing a misleading anecdote suggesting out-of-control inflation can go viral; a story about gradually improving outcomes is far less shareable.
Fourth, perceptions lag behind reality. When President George H.W. Bush lost his bid for re-election in November 1992, Americans believed the US was still in recession; but the recession had ended in March 1991. Likewise, during the 2010 midterms and even the 2012 presidential election, many Americans thought the Great Recession – which had ended in June 2009 – was still going. The same lag might be in play today. After all, it takes an estimated two years for a change in inflation to have three-quarters of its cumulative long-run effect on consumer sentiment, and inflation started to fall in the US in June 2022.
Fifth, the problem is not the rate of price rises, but the price level: US CPI was 16% higher in January 2024 than it was three years earlier. This has reinforced the narrative – perpetuated by both mainstream and alternative media – that, even as inflation dissipates, its legacy of higher prices is reducing households’ real incomes and thus their standard of living.
But over that same three-year period, hourly wages rose by 16%, national income increased by 18%, nominal GDP grew more than 21%, and US dollar consumer spending expanded by 23%. US households’ purchasing power is thus higher in real terms than it was three years ago, despite higher prices.
To be sure, though the genuine costs of moderate inflation are low in a given year – especially compared to the real benefits of economic growth – creeping inflation will eventually interfere with the working of an economy. It is not possible to keep the economy overheated permanently.
So, the recent increase in prices is not making it harder for most Americans to make ends meet (at least not harder than it was before the recent bout of inflation began). While economists cannot dismiss people’s perceptions – inflation is unpopular, even when its effects on real incomes are technically offset – nor can we accept narratives that conflict with the facts.
Some still argue – and this is the final explanation – that even if the average American is doing okay, inflation is hurting lower-income households. It isn’t. Real weekly wages have been rising since inflation peaked in the second quarter of 2022, especially for the lowest decile of workers. What about the elderly person who depends on Social Security, and makes mortgage payments on their house that in 2020 left their bank account empty at the end of the month? They are now ahead of the game, because Social Security payments are indexed to inflation.
While there need not be one single explanation for negative perceptions of the economy, the lag hypothesis seems most persuasive. There are reasons to believe that Americans are beginning to realize that things are getting better. For starters, as Krugman has pointed out, poll respondents are more positive about their own finances; it is when asked about the economy as a whole that they express pessimism. Moreover, consumer spending has risen rapidly.
Then there are the most recent survey results. The University of Michigan’s consumer sentiment index, which was puzzlingly low in 2022 and early 2023, has risen since November. According to Gallup, fewer voters now view economic issues as America’s “most important problem” than did in October, and more express confidence. Some media are reporting improved perceptions.
In just two years, the dominant narrative has shifted from “we are currently in recession” (early 2022) to “recession is imminent and inevitable” (late 2022) to “confidence in the economy is low” (early 2023) to “there is a gap between bad perceptions and good indicators” (late 2023). Perhaps the narrative tomorrow will be that the economy is good – and people know it.
Jeffrey Frankel: Professor of Capital Formation and Growth at Harvard University, served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research.
