Resilient: A single word to capture the U.S. economy over the past five years. It’s remained on solid footing despite an unprecedented upheaval and equally dramatic recovery. But during this period of sometimes-puzzling economic strength, the people haven’t entirely been feeling it: Despite strong numbers on average, consumer sentiment is lackluster.
Economics is a complex, pervasive topic. When you begin to study it, you realize just how much you have to learn. I know that was the case for me, even before graduate school. So, for the general public, misinformation or misunderstandings could certainly prompt part of the gap between sentiment and reality. The easy answer is to assume ignorance. By implying the data is right and the people are wrong, you make it OK for economists, policymakers and journalists to cast aside these “flawed” perspectives.
Whether sentiment is shaping household and broader economic strength or being used by economists to predict spending and saving, how people perceive their economy matters.
This report examines the disconnect between economic data and sentiment, and potential reasons for it. It then discusses why we shouldn’t be too quick to discount how people feel about their economic prospects.
Post-Covid: The economy came back strong, sentiment stayed weak
The past five years have been characterized by remarkable times that, in some instances, led to predictable outcomes in the economy. In other instances, there were outcomes we didn’t — and sometimes simply couldn’t — see coming at all.
… (additional content omitted for brevity) Consumer sentiment hit an all-time low of 50 in June 2022, lower than in 1980 when inflation peaked at 15%. Since then, it has modestly recovered to 67.8 as of August 2024, described as “stubbornly subdued” by the program director. The Consumer Confidence Index also remains below prepandemic levels. A survey found that 60% of Americans believed the economy was in a recession in mid-July, despite official data not indicating a recession. Unemployment has risen, the labor market is cooling, and consumer spending growth is slowing, but the economy continues to expand.
Economic data is often reported in averages and medians, which may not reflect individual experiences. For example, while wages grew 19% from 2020 to 2024, not everyone experienced the same increase. Personal experience plays a significant role in shaping one’s outlook on the economy, with 34% of Americans citing personal experience as a key source of economic information.
Increasing inequality and wealth disparities could further widen the gap in economic sentiment. Despite some households experiencing income growth, it does not always translate to wealth or stability. The lowest earners saw real wage growth decline, impacting overall consumer resiliency. Wealth disparities have also widened, with the top 10% seeing significant asset growth compared to the lowest earners.
Households with lower incomes and less financial stability may be more dissatisfied with the economy, particularly due to their sensitivity to price changes. However, individual experiences alone cannot explain the disparity in economic sentiment. A survey found that half of Americans felt worse about the state of the U.S. economy in April 2024, indicating a disconnect between personal experiences and broader economic outlook. The economy is a highly emotional and controversial issue for many Americans, with 81% considering it a “hot button” issue. When asked about their feelings on economic and financial conditions compared to 12 months ago, 49% said they felt worse about the state of the U.S. economy in general. However, only 29% felt worse about their own personal finances over the same period.
The strong emotions tied to the economy can influence people’s perspectives and make it difficult to separate sentiment from reality. The quality of information sources also plays a significant role in shaping beliefs, with different sources providing varying perspectives on the health of the economy.
Increased partisanship in the U.S. has led to a widening gap between economic reality and sentiment, potentially fueling the spread of misinformation. Consumer sentiment index scores show a clear shift in perspective based on political party alignment, with individuals more likely to feel positively about the economy when their party is in power. This partisan divide can skew interpretations of current economic conditions and lead to misinformed beliefs. Nostalgia often leads us to believe that the past was better, even if it wasn’t truly the case. Our memories of the economy can be influenced by our current circumstances, making it easier to focus on present challenges rather than past ones. For example, many Americans remember the summer of 2010 as a strong economy, despite the record foreclosure rates following the Great Recession. This tendency to recall the past in a positive light can amplify our dissatisfaction with the present.
One reason for this misremembering is the fading affect bias, where negative emotions fade faster than positive ones. Additionally, discussing good times is more enjoyable than discussing bad times, leading us to revisit the negative events less often. This disconnect between economic data and sentiment exists for various reasons and to varying degrees in individuals.
Consumer sentiment can act as a predictor of economic health, influencing spending behaviors. When people feel positive about the economy, they are more likely to spend freely, driving economic growth. Conversely, negative sentiment can lead to decreased spending and savings. This relationship between sentiment and spending can create a self-fulfilling prophecy.
Ultimately, beyond the predictive value of sentiment, it is important to consider how our communities feel. People’s perceptions of the economy can impact their overall life satisfaction, and promoting well-being can have positive effects on economic productivity and creativity. Happiness economics explores the reciprocal relationship between personal well-being and economic prosperity, highlighting the importance of addressing both for a thriving society. The concept of feeling good and working smarter is not limited to individuals but also applies at the business and national level. Positive sentiment can play a significant role in driving effective policies that benefit society as a whole. This responsibility extends to those who communicate about the economy, as conveying accurate information in a clear manner is crucial for people’s well-being.
Empathy is essential in this process, as it helps in understanding the various perspectives from which individuals perceive economic information. While data may provide an overall view of the economy, individual experiences and emotions can differ significantly. Therefore, it is important for communicators to be trustworthy sources that consider the diverse viewpoints of their audience.
In conclusion, creating a connection between economic information and people’s feelings can lead to better communication and coverage. By exploring this disconnect, we can ensure that accurate information is shared in a way that resonates with individuals on a personal level. This approach can ultimately contribute to a more informed and empowered society. text in a different way:
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