A residual resentment stemming from the recent high rates of inflation seems to have damaged consumers’ perceptions of the economy.
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 automobiles are taking the place of less 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?
‘High prices really hurt’:
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.
Inflation vs. the job market:
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 better measures an individual’s sentiment toward the employment market than the Michigan index, which gathers questions about purchasing power and financial circumstances. According to University of North Carolina finance professor Camelia Kuhnen, this places the latter more in line with data that presents a more optimistic picture of the economy.
Kuhnen remarked of the two bills, “You think that they’re talking about different countries.” Because they emphasize distinct facets of what people would regard to be a part of their economic reality, they appear 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.
Silver linings 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.
Without those buffers, those with lower incomes might be more negatively impacted by rising expenses that eat away at any savings they may have from the epidemic boost, according to Kuhnen. According to Karen Dynan, a Harvard professor and former senior economist for the U.S. Treasury Department, the return of student loan payments this year probably also provoked resentment for those who still owed money.
Earlier this year, Marissa Lyda and her husband and two children moved from Portland to Phoenix, partly because of cheaper housing. Her family was able to purchase a better home in the Grand Canyon state because to the money she made from the sale of the land she purchased in 2019.
However, she now has to deal with an interest rate that is more than twice as much as what she paid for her previous house. Despite the fact that her family’s income has increased due to Arizona’s reduced income tax, Lyda has discovered that she must devote a significant portion of that money to her growing grocery expenditure.
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 trying to hold 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.
Lyda has made financial sacrifices to make sure her family can afford to enjoy a special first holiday season in their new house, including weekly Starbucks lattes. 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.
