Lingering inflation can’t explain all of the unhappiness; maybe it is referred pain from the wider world
WSJ
Last week we learned that the economy, far from sliding toward recession as economists had predicted over the past year, has actually picked up steam thanks to indefatigable consumers.
Not only has economic output made up all the ground lost during the pandemic, but it is also above where it would have been had the pandemic never happened, judging by what the Congressional Budget Office projected in early 2020.
The same goes for the job market. The unemployment rate at 3.8% is only marginally above where it stood in January 2020. For a while, low unemployment overstated how healthy the job market was because so many people had left the labor force. But except for those over 64, they have mostly returned. The share of the population ages 15 to 64 with jobs topped its prepandemic peak in August.
So if the economy is so good, why are Americans so gloomy? Confidence readings are depressed. Some 69% of respondents to a Wall Street Journal survey in August said the country is headed in the wrong direction. President Biden’s approval ratings are mired around or below 40%, and approval for his handling of the economy is even lower.
The most popular explanation for this dichotomy is that good feelings about jobs are more than offset by high inflation. There is a lot of evidence for this, but it is still not an entirely satisfying answer.
There are two longstanding surveys of consumer confidence. The index produced by the Conference Board, a business research group, incorporates attitudes about the labor market, but not inflation. And this index remains well above its lows around the 2008 and 2001 recessions. No dichotomy there.
By contrast, the University of Michigan sentiment index is at recession-like levels. It appears to be more sensitive to inflation, in part because it asks people if they are financially worse off, and recently 40% of those feeling worse off blame inflation.
But can inflation be the whole story? After all, since peaking at 9.1% in June last year, based on the consumer-price index, inflation has fallen to 3.7%. Some gauges put underlying inflation at around 3%, and the Federal Reserve thinks it is headed gradually to 2%, relieving it of any need to raise interest rates for now. And yet, sentiment is up only moderately since inflation began falling.
The puzzle deepens when I plot the University of Michigan index since 1978 against the “misery index”—the simple sum of inflation and the unemployment rate. Based on historic correlations, sentiment has been more depressed this year than you would expect given the level of economic misery.
[graph omitted]
True, for a long time wages were lagging behind inflation, but not anymore. Median weekly wages are slightly higher now, adjusted for inflation, than at the end of 2019. They haven’t grown, as they did in the years before the pandemic. But other things should have compensated for that.
Workers are getting more time off and more flexibility, which is why the Conference Board finds job satisfaction is also quite high. Federal pandemic relief means household finances are stronger, even now, than before the pandemic. Meanwhile, high housing and stock prices lifted the median household’s wealth after inflation by 37% between 2019 and 2022, the largest in the history of the Federal Reserve’s survey.
Part of the problem is that in inflationary periods both prices and wages rise but people dwell more on the prices and feel worse off. Moreover, while the Federal Reserve targets inflation—the rate at which the level of prices rises—consumers also care about the absolute level of prices and are bothered they remain so much higher than a few years ago.
The average Starbucks coffee has gone from under $3 at the start of the pandemic to $3.63 in the second quarter, according to Numerator, a marketing data company. Grocery prices have stopped going up, but “right now, it is still a little bit of sticker shock,” Steve Cahillane, chief executive of Kellanova, formerly part of Kellogg, said in September. High home prices are a particularly dispiriting form of sticker shock because, in combination with high mortgage rates, they have put homeownership out of reach for so many.
Yet sticker shock alone doesn’t seem severe enough to explain the profound level of economic dissatisfaction.
[graph omitted]
No doubt, political polarization plays a part. Democrats and Republicans think the economy is great when their party controls the White House and terrible when the other party does. A Quinnipiac poll in August, for example, found that more than half of Republicans and Democrats rated their personal situation as excellent or good, but only 5% of Republicans said that about the economy as a whole, compared with 58% of Democrats.
Still, you would expect Democrats and Republicans to balance each other out. And yet the national mood has worsened over time. The share of survey respondents saying the country is headed in the wrong direction topped 50% in the mid-2000s during former President George W. Bush’s second term and hasn’t gone below since. Biden’s approval ratings have, on average, been close to President Trump’s, and both are far below what either Bush or President Obama averaged in their first terms.
I suspect a lot of pessimism about the economy is “referred pain.” Just as one part of your body can hurt because of injury to another, pessimism about the economy may reflect dissatisfaction with the country as a whole. Lately, there has been a lot to be dissatisfied about: intensifying political and cultural conflict and intolerance, the pandemic, the border, mass shootings, crime, war in Ukraine and now the war in the Middle East.
The average Starbucks coffee was under $3 at the start of the pandemic. PHOTO: GABBY JONES/BLOOMBERG NEWS
Indeed, it is hard to explain voter attitudes otherwise. Just 37% approve of Biden’s handling of the economy, according to the Journal survey, which may or may not be fair. Yet just 39% approve of his handling of Social Security and Medicare, which is odd since he has literally done nothing to either. (Given the growing cost of the programs, some of us think doing nothing is a bad thing, but we’re in the minority.)
Only 45% approve of Biden’s handling of infrastructure, and 42% of how he’s bringing manufacturing jobs back to America. These are weirdly low numbers for a president who has signed popular legislation boosting infrastructure and manufacturing.
The good news for Biden, if you want to call it that, is that people may not be as upset about the economy as they tell pollsters. The bad news is, they are pretty upset about everything else.
