Important Points
- Consumer perceptions of the economy appear to have worsened due to lingering resentment over recent high inflation.This unhappiness occurs despite the fact that some people’s financial circumstances have improved due to a robust labor market, rising housing values, and a stock market bounce.
Kyle Connolly believes that 2023 will be remembered as a year marked by difficulties and transitions.
After becoming a single parent, the woman went back to work, but in November she lost her position at a firm that built custom homes. Connolly has noticed price increases for everything at the same time, including her condo’s power bills and her Aldi grocery basket.
She has therefore reduced her consumption of common indulgences like eating out or going to the cinema. Compared to previous years, her three children’s Christmas will be simpler.
The 41-year-old declared, “I’ve trimmed everything that I possibly can.” “I hate having to say no to my kids. When they ask for a little something more in the grocery store and we have to say, “No, I’m sorry, we can’t,” it stinks.
Her neighborhood in the panhandle of Florida appears to be experiencing more economic hardship. Connolly has seen that older Toyota Camry cars are taking the place of 2022 Chevy Suburbans on the road. The normally bustling seas have been strangely empty as owners have either sold their vessels or made fuel-saving measures. Facebook groups have been used by other parents to exchange ideas about how to make extra money or better manage their finances.
Connolly’s and her neighbors’ troubles draw attention to a major mystery that confounds economists: Why does the typical American feel so negatively about an otherwise robust economy?
‘Exorbitant costs are quite painful.
It has been a successful year in this regard by many accounts. The labor market is still robust, but the annualized rate of price growth is getting closer to the level that the Federal Reserve prefers. More people are beginning to believe that monetary authorities have managed to reduce inflation without sending the country into a recession.
However, properly examined University of Michigan survey data reveals that although consumer sentiment has improved, it is still very different from pre-pandemic levels. The sentiment index value for December was up over 17% from the previous year, although it was still roughly 30% lower than it was in the same month last year.
The primary problem, according to Joanne Hsu, director of consumer surveys for Michigan, is that expensive goods truly hurt. “People in America are still having difficulty accepting that the prolonged era of low interest rates and low inflation that we experienced in the 2010s is not returning. Furthermore, that reality does not exist right now.
Even so, Hsu finds cause for hope upon closer inspection. Since consumers began to notice that inflationary pressures were lessening, sentiment has significantly improved from its all-time low observed in June 2022, the same month that the consumer price index increased 9.1% from the previous year, according to her.
She linked the decline in attitude in May of last year to the negotiations over the US debt ceiling, which is one noteworthy caution. Some people feel even more apprehensive about the economy as a result of the 2024 presidential race, according to Hsu.
The job market versus inflation
Economists predicted that sustained strength in the labor market would improve the perception of the economy among regular Americans. However, since consumers make their own decisions about how they feel, jobs might not be as important to them mentally as inflation.
The Bureau of Labor Statistics’ most recent statistics shows that there are still more job opportunities than there are unemployed persons. Seasonally adjusted Labor Department numbers show that average hourly income has continued to rise, but at a slower rate than during the pandemic. In November of this year, it was roughly 20% higher than it was four years prior.
This has contributed to an increase in the Conference Board’s consumer confidence index, another widely watched mood gauge. It has recovered significantly more than the Michigan index, with its preliminary December reading being about 14% lower than the same month in 2019.
The Conference Board’s index more closely measures an individual’s sentiments regarding the employment market, whereas the Michigan index gathers questions centered around financial situations and purchasing power. According to Camelia Kuhnen, a finance professor at the University of North Carolina, this places the latter more in line with data that presents a more positive image of the economy.
About the two initiatives, Kuhnen remarked, “You think that they’re talking about different countries.” “They focus on different aspects of what people would consider to be part of their economic reality, which is why they look different.”
Michigan’s Hsu pointed out that there can be negative effects on sentiment from a strong job market. Indeed, she argued, it helps employees find better jobs or higher salaries. However, a tight market means fewer hours or restricted availability at their repair business or veterinarian’s clinic for those same workers when they put on their consumer hats.
Positive aspects for some
Economists claim that additional factors contributing to consumers’ good sentiment toward the economy this year can only apply to specific, frequently wealthier, groups.
According to UNC’s Kuhnen, Americans would be happy to see price appreciation if they were homeowners. An further cause for hope is if they made investments during the stock market boom in 2023.
According to Kuhnen, in the absence of those buffers, people with lower earnings would be more severely affected by growing costs that consume any savings they may have from the epidemic boost. Harvard professor Karen Dynan, a former senior economist for the U.S. Treasury Department, believes that the return of student loan payments this year likely incited anger among individuals who were still in debt.
Morgan Stanley’s Chris Toomey claims that customers are under a lot of pressure.
..Marissa Lyda relocated to Phoenix earlier this year with her husband and two kids from Portland, in part due to housing costs that were lower there. With the money she earned from the sale of the land she bought in 2019, her family was able to buy a better house in the Grand Canyon state.
She now faces paying an interest rate more than twice as much as she did for her last home, though. Lyda has found that even though her family’s income has increased as a result of Arizona’s lower income tax, a sizable percentage of that money must go toward her increasing grocery expenses.
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As value grew in importance, the stay-at-home mother moved from Kroger to Walmart as her preferred grocery store. She has also noticed that she is spending more time looking for store-brand food in the aisles and looking for recipes that call for less ingredients.
Lyda stated that her family’s financial circumstances don’t seem to be indicative of the economy that she hears professionals discussing. It’s more like the videos she watches on TikTok and the conversations she has with friends about how hard inflation is still hitting their wallets.
The 29-year-old remarked, “I see how they’re like, ‘Oh, best earnings, there’s been great growth.'” “And I wonder, ‘Where has that been?'”
“Just attempting to hang on”
Economists question if conversations about a possible recession on social media have led Americans to believe that their feelings about the state of the economy are worse than they actually are. That would contribute to the explanation of why consumer spending is still high even though consumers usually tighten their belts when they anticipate financial difficulties.
According to Harvard’s Dynan, there’s also a sense of whiplash from the uncontrollably high inflation that ended a protracted period of low-to-normal price increases. Even while the yearly rate of inflation has already dropped to more manageable levels, rising costs have left customers uneasy.
According to Dynan, “people are still upset about the inflation we witnessed in 2021 and, especially, 2022.” “Compared to the annual pay raise, there seems to be a difference in the salience of the lunch bill that you see on a daily basis that may resonate in your mind
An additional possible issue is that the general public might not fully comprehend that some inflation is normal. In actuality, the Federal Reserve, which determines monetary policy in the United States, strives for annual price increases of 2%. In actuality, deflation—a drop in prices—is viewed negatively for the economy.
Notwithstanding these conundrums, analysts are upbeat about the coming year since it seems more likely than not that a recession has been averted and the Fed will be able to cut interest rates. Connolly and Lyda, two regular Americans, will continue to be concerned about inflation and their financial situation.
In an effort to make sure her family can afford to enjoy a special first holiday season in their new home, Lyda has eliminated indulgences like weekly Starbucks lattes from the budget. She’ll be keeping an eye out in 2024 to see whether the Federal Reserve lowers interest rates, which would present a chance to refinance the house loan.
Lyda stated, “You just have to understand that every season of life may not be this great financial season.” Sometimes you’re just trying to get by throughout a season. And I believe that the majority of Americans have experienced it similarly.
