Almost two years have passed since I began drawing people’s attention to the ever-widening gap between economic perception and economic reality. At the time, the economic picture was mixed, with rapid employment growth but also rising inflation; Even given this mixed picture, consumer sentiment appeared to be unusually poor.
I think it’s fair to say that I encountered a lot of resistance. Eventually, inflation rose, and many economists warned that falling again would require a severe recession.
But that was not the case. Unemployment is still near 50-year lows, yet inflation has fallen rapidly; Consumer prices didn’t rise at all in October, although that’s partly due to statistical noise. Many economists looking at the data are almost giddy about how well things are going; The latest major report from Goldman Sachs (whose economists got disinflation right) is titled “The Hard Part is Over.”
But consumer sentiment surveys and political polls continue to show that Americans have a very negative view of the Biden economy. There is still no consensus on the reasons for this discrepancy. But there are some new studies that shed light on what’s going on, and I have a new way of looking at the numbers that may also provide some clarity.
Let me start with an image from the Briefing Book, a blog written by former government officials. They have put together a model (actually several models) that represents the historical relationship between fundamentals like inflation and unemployment on the one hand and consumer sentiment on the other. Until the pandemic, such models worked quite well; But at this point, consumers appear to be far more pessimistic than they “should be”:
I will return to your explanation of the gap. But first of all, let alone the aggregate economic statistics: What is happening to workers?
For a while, many experts insisted that whatever happened to GDP, wages were not keeping pace with inflation – which was true for a while. But not anymore. I already knew this more or less from the work of Amherst’s Arin Dube, but a new, comprehensive analysis by Joseph Politano really gets to the heart of the matter. In any case, real wages are now higher than before the pandemic; For non-managerial workers, who make up the majority of the workforce, they are higher than you would have expected based on the pre-pandemic trend.
But whatever, these numbers. Americans say things are bad; Shouldn’t we take them at their word?
One answer is: look at what they do, not what they say. In fact, the collapse in consumer sentiment during the Biden years was comparable in magnitude to the collapse during and after the 2008 financial crisis – which is itself a remarkable observation, considering that the collapse continued for years after 2008 From Covid we quickly returned to full employment. However, consumer spending, which stalled during the last crisis, has simply continued to rise this time. Here is a table showing all variables as percentage changes from the start date:
So consumers may say the economy is bad, but their spending suggests they’re feeling pretty good about their personal financial situation. I guess they believe bad things happen, but only to other people.
Anyway, Briefing Book’s analysts looked into a possible reason for this discrepancy that I’ve speculated about from the start – but they’ve done the math. It is now a well-known fact that partisan orientation influences expressed views on the economy: Democrats are more positive when a Democrat holds the White House, Republicans are more positive when the president is a Republican. The briefing book shows that this effect is not symmetrical: it applies to both parties, but the partisan effect on sentiment is two and a half times larger for Republicans than for Democrats.
And it is estimated that this “asymmetric amplification” alone accounts for 30 percent of the gap between economic sentiment and economic fundamentals.
Wait, there’s more. The importance of partisanship in shaping economic perceptions shows us that much of what people say about the economy reflects what they hear either from news organizations or on social media, rather than their own experiences. And it’s a running joke among the economists I talk to that even mainstream news organizations seem to have difficulty saying nice things about the Biden economy. For example, when a new jobs report comes in, the headlines typically don’t say something like, “Job growth exceeds expectations”; They go more along the lines of: “Rapid job growth could soon slow, experts say, posing problems for Biden.”
You could say that things like this can’t really be important, that people know what’s really happening. But the evidence on partisanship and perceptions suggests otherwise.
Now, I’m not saying that’s the whole story. Inflation may be slowing, but prices have risen sharply in recent years, and that still angers people — although, as I noted last week, that anger didn’t seem to last after previous temporary bouts of inflation. And general unease about the social impact of the pandemic could be reflected in what people say about the economy.
Still, we can acknowledge that other factors are at play without denying two clear facts about the economy: most American workers are actually better off than in the past, and a significant portion of the negative economic commentary reflects partisanship rather than reality .
Oh, and one more point: Negative economic sentiment may not be as important to the 2024 election as many think, since a large portion of it comes from people who would never vote for a Democrat under any circumstances.
Quick hits
Inflation distributions (they look good).
The markets are happy.
Accommodation prices are a lagging indicator – and they’re all that’s left.
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