The U.S. economy has momentum: Inflation is down, stocks are breaking records and the job market is exceptionally strong. And yet many Americans haven't noticed.
According to a Gallup poll last month, 63% of Americans say the economy is getting worse and just 30% say it is improving, despite several economic indicators pointing to progress. Meanwhile, 45% of respondents describe the economy as “bad,” while another 29% say it is “just fair.”
Is the public underestimating the positive aspects of the current economy? Perhaps.
“I'm always hesitant to tell people they're wrong about how they feel,” says Michel Linden, senior policy fellow at the Washington Center for Equitable Growth, a left-leaning think tank. With that caveat, he says it's “puzzling” that economic progress isn't leading to more support for the Biden administration's handling of the economy ahead of the 2024 election.
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Democrats claim inflation has fallen to 3% and unemployment is still near historic lows. The recession you were warned about? It did not happen.
It's “contrary to what almost everyone predicted,” said Daniel Hornung, deputy director of the National Economic Council. “Fundamentally, we have a strong economy that has improved significantly over the last year.”
Of course, conservative economists see it differently. For them, public opinion on the economy is evidence of serious problems under the hood. “I actually don’t think it’s puzzling at all,” said Richard Stern, director of the Heritage Foundation’s Federal Budget Center.
Stern says the biggest problem is the damage from more than two years of strong inflation. It has unhinged people in ways that may take years to recover from.
“People have kept their jobs, but their jobs pay them much less in real dollars,” Stern says. “The purchasing power of most American workers has fallen by thousands of dollars.”
Given that it is an election year, there are political motivations everywhere to portray the economy as better or worse than it is. In reality, conditions are probably not as rosy as the Biden administration claims, nor as bleak as Republicans claim. This is what the data tells us.
4 things to love about the current economy
The president likes to say that his administration has gotten the country “back on its feet.” From an economic perspective, there are some strong numbers to support this.
1. The job market is strong
The current unemployment rate of 3.7% is still as good as it has ever been. Although it is slightly above the record low of 3.4% in January 2023, anything below 4% is considered full employment.
Americans have jobs, and not only that, but they are earning more because the demand for workers continues.
“Prices exceeded wages,” says Harvard economist Jason Furman, a senior fellow at the Peterson Institute for International Economics. “Now wages are exceeding prices.”
Average hourly wages are increasing by 4.5% annually, which is above the inflation rate of 3.1%. Wages have been exceeding inflation since mid-2023. According to Hornung, this wage growth gives families “breathing room.”
2. Stocks are recovering
The S&P 500 just hit the 5,000 mark for the first time, the latest milestone in a remarkable rally for the U.S. stock market. Last year alone, the S&P 500 rose more than 22%.
Recent market gains are leading to more money in people's retirement accounts and overall investment portfolios.
3. Savers can actually earn decent returns
Opportunities for meaningful returns on savings accounts are typically one of the benefits of a higher interest rate environment – and that is clearly the case right now. The average interest rate on savings accounts is at its highest level since the Federal Deposit Insurance Corp. began tracking. (FDIC) in 2009.
High-yield savings accounts offer interest rates above 4%. This is easy money with no risk.
And if you have savings that you don't plan on using for a long time, you can lock in an even higher interest rate with a certificate of deposit (CD).
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4. Lower interest rates are on the horizon as inflation eases
The market expects the Federal Reserve to cut interest rates by at least a quarter point by June. It would be the first rate cut in four years and a crucial moment after the period of intense tightening in the fight against inflation.
If the predictions hold true, borrowing for things like houses and cars would become cheaper and people would be able to refinance existing loans. Lower interest rates can also stimulate economic growth and lead to higher stock prices.
Rate cuts are not guaranteed this spring, but the fact that they are actually a real possibility is progress, economists say.
4 things to hate about the current economy
Of course, at the same time, it may be true that the economy has improved and challenges such as high housing costs and interest rates remain. Here are four big reasons Republicans say the economy is in shambles.
1. Everything is expensive
People are struggling to afford rent, bills and groceries at higher prices. Since January 2021, consumer prices have increased by more than 17%. This is the worst three-year rise in inflation in more than four decades.
The Fed's higher interest rates have finally brought inflation down, but Americans have lost so much purchasing power in 2021 and 2022 that the damage has already been done.
“The vast majority of Americans went to work for two years and fell further behind. And they haven’t forgotten that,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank. “Inflation has been extremely damaging to people’s perceptions of the economy.”
2. Housing is unaffordable
In an ideal economy, more Americans who want to buy homes would achieve their goals. Instead, the housing market is developing extremely slowly.
According to the National Association of Realtors, home sales last year were at their lowest level since 1995. Affordability is the biggest hurdle for most buyers: Home prices have risen 35% in the last three years, and it certainly doesn't help that mortgage rates have risen from 3% in 2021 to 6.77% now.
People with home equity have benefited from the massive rise in property prices, but the dream of buying a home now seems out of reach for many renters.
Conditions are expected to improve later this year. Mortgage rates should fall if the Fed cuts rates, and home prices could fall slightly, although most experts predict very little, if any, decline. However, affordability will continue to be a challenge for potential homebuyers.
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3. Insurance costs are eating up more and more of Americans' budgets
Inflation has cooled on most things, but insurance prices are still rising, especially for home and auto insurance.
Home insurance prices are expected to rise by double digits in 2024, and some homeowners fear rising insurance costs could drive them away from their homes. Insurance prices have risen so much and so quickly that 12% of homeowners say they are foregoing insurance altogether because of the cost.
According to the Consumer Price Index, the price of car insurance increased by 20.6% last year.
4. High interest rate debt makes borrowing even more expensive
Interest rates on all types of loans are currently still shockingly high. Borrowing money for things that really matter—houses, cars, and education, for example—is often considered “good debt.” But a car loan with an `R of, say, 9.7% is far from ideal.
This means people are forced to choose between delaying financial goals or taking on high-interest debt. All you can do is drive an old car or live in a house you've outgrown for so long. At some point, people bite the bullet and take on debt at an undesirable interest rate.
This, in turn, can leave you struggling to pay your bills from month to month. Auto loan delinquencies just reached their highest level in 10 years, and loans opened in 2022 and 2023 are “performing worse than loans opened in earlier years, perhaps because buyers in those years are facing higher car prices.” “faced and may have been forced to borrow more and at higher interest rates,” researchers said.
Credit card delinquencies are also at their highest level in 10 years and balances are up to $1.13 trillion, up 14.5% from a year ago.
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