America's strong economy has an undercurrent of anger
As it turns out, the big economic story of 2023 is not a recession, but a disconnect between consumer sentiment and behaviour. Higher than normal inflation over the past two years is an obvious reason that people would be down about the economy. The puzzle is why people are still behaving as if their economic situation is good.
Inflation-adjusted consumer spending is not only above 2019 levels, but above the pre-pandemic trend. In fact, it’s largely the reason that US economic growth is above expectations. And yet consumer sentiment is at levels typically seen only in a recession.
Economists tend to believe actions over words. You can insist that you prefer a vegetarian diet, but if you keep eating hamburgers, we will conclude that you actually prefer an omnivore diet. So if you say the economy is terrible but spend like it’s 1999, some economists will tend to trust what you do over what you say.
These economists argue that economic data showing a strong economy implies that people are not honest about how they feel about the economy. Instead, they are aligning their views with their political preferences. This argument maps on to the large disparity between Republican and Democratic views of the economy, a gap in attitudes that is not matched by a gap in their economic experience.
While inflation is the obvious pain point in the economy, it has also been substantially reduced—from more than 9% last year to 3.7% today. Hopefully it will continue its decline, but the current rate is within historic norms for the US, and even a bit lower than it was in 2011. Another common explanation for the disconnect between people’s anger and their behaviour is prices.
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