April 22, 2024
Economy

American consumers are finally cheering up


FOR THE past year America’s economy has suffered from an emotional disconnect. Analysts and investors have been impressed by its growth, which has consistently exceeded forecasts and run ahead of the country’s rich-world peers. But Americans themselves have been much harder to please. The most closely watched gauge of popular sentiment about the economy—a monthly survey conducted by the University of Michigan—has yielded exceptionally low results, roughly the same as during the global financial crisis of 2007-09.

With a presidential election just nine months away, these downbeat feelings have become a big problem for Democrats. President Joe Biden already faces plenty of challenges in his bid for a second term, starting with concerns about his fitness to serve as an octogenarian. Polls giving him low marks on his handling of the economy are another major headwind.

But things are looking up for Mr Biden. On February 16th the University of Michigan published its latest survey results. Its preliminary sentiment index came in at 79.6, its third straight monthly increase (see chart 1). The rate of improvement is especially striking. The 30% increase since November marks the survey’s biggest rise over any three-month period in more than three decades. The level remains glum by historical standards: about 15% below its average in the five years before the covid-19 pandemic.

Looking at an array of hard economic data, for sentiment to be improving but still low seems about right. Consider five separate figures, all of which feed into people’s views about the economy (see charts 2-6). Inflation has slowed appreciably: consumer prices rose 3% in January compared with a year earlier, down from a 9% pace in mid-2022. But relief at the slowdown in inflation is tempered by the reality that prices are still nearly 20% higher than on the eve of the pandemic. Sticker shock does not vanish so easily. The price that is perhaps most noticeable for Americans is that of petrol—blaring at them on big roadside signs. Like inflation more generally, the price of petrol is well down from its mid-2022 peak but still quite a bit higher than before the pandemic.

If sentiment were about inflation alone, consumers would probably be even more depressed. But other economic trends that matter to them are more favourable. The labour market remains particularly strong, exemplified by an unemployment rate of just 3.7%, not far off a five-decade low.

That has led to robust nominal wage growth. Controlling for inflation, average earnings are basically back on their pre-pandemic path, and steadily rising. (A brief surge in 2020-21, visible in the chart, was a composition effect: as low-income workers lost their jobs, average earnings of those still employed were higher.) Finally, the upward march of the stockmarket to a record high adds weight to the argument that the economy is in good shape.

Add it all up, and you get a mixed result. A strong job market and resilient growth are points in favour of positive feelings about the economy. The lingering effects of high inflation push the other way. The extremely bleak sentiment surveys were overdone last year. But the more middling ones now seem about right.



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