The Great Divide: The Gap Between Public Perception and Economic Reality
Introduction
As we gradually emerge from the shadows of COVID-19, the American economy appears to be on a steady path to recovery. Recent months have seen promising signs of prosperity, with low unemployment rates and strong consumer spending painting a picture of economic resilience. However, despite these tangible indicators of progress, there persists a sense of uncertainty and dissatisfaction among the American public. Why does this persistent gap between the American public’s perception and the actual state of the economy exist, and what implications does it hold for the future?
Quantifying Economy Performance - How Good is the Economy Doing?
The recent surge in job creation in the United States, exemplified by the addition of 353,000 jobs in January alone, has surpassed economists’ forecasts, highlighting the robustness of the labor market. Revised figures for job growth in 2023 show an even more impressive performance, with employers adding 2.7 million jobs (DePillis, 2024). Despite challenges posed by the COVID-19 pandemic and interest rate increases, these figures have surprised many economists. The unemployment rate has remained below 4% for 24 months, and job gains across sectors like professional/business services, healthcare, and manufacturing underscore the broad-based nature of the recovery.
Encouragingly, wage inflation remains modest, with wages rising at a steady 4% annual rate and no significant increase in labor costs per unit of output during Q3 of 2023 (Schneider, 2023). This moderation in wage growth, along with recent boosts in productivity and a decrease in average hours worked, indicates that companies are not under pressure to raise prices significantly due to higher labor expenses. Federal Reserve Chair Jerome Powell noted that strong job creation has been accompanied by wages higher than inflation, contributing to real wage growth. This not only increases workers' purchasing power but also incentivizes workforce participation and discretionary spending, driving overall demand and stimulating business activity.
The Public’s Perception of the Economy
Despite positive economic indicators, many Americans express dissatisfaction and uncertainty. Bankrate reported that nearly 59% of individuals across demographics agreed that the economy was in a recession, leading some to term it a ‘silent recession’ (Foster, 2023). This perception-reality gap is influenced by factors like inflation and distrust in the government.
The recent decline in consumer inflation in the United States is suggesting an easing of economic strain, with rates dropping from 9.1% in June 2022 to 3.4% by December 2023. However, despite this apparent improvement, many Americans continue to express deep concern about inflation. Why? The answer lies in how humans perceive and prioritize inflationary trends. People tend to focus more on the prices of everyday items, like groceries and fuel, which are experiencing ongoing slight increases, rather than large purchases, where prices may be declining. For example, while the cost of electronics and furniture has been decreasing, essential items like food are still on the rise, disproportionately affecting household budgets. This phenomenon is further illustrated by the “Snickers bar effect” - individuals are more likely to remember the price of daily indulgences, like a chocolate bar, than larger expenses, like a television, influencing their perception of inflation (Donovan, 2024). In other words, consumers often prioritize returning to price levels they remember, regardless of the overall inflation rate.
Trust in the U.S. government and its institutions has reached unprecedented lows, as recent surveys highlight widespread disillusionment. This sentiment extends to economic disillusionment, as citizens perceive a lack of effectiveness in economic management and policy-making, fostering uncertainty and eroding consumer confidence in the economy’s stability and trajectory. For example, according to a Pew Research study, only 20% of Americans approve of Congress's job performance, with a staggering 78% expressing disapproval. Additionally, trust in the federal government's ability to handle international and domestic challenges has sharply declined over the past decade, plummeting from two-thirds of Americans a decade ago to just 39% last year (Pew Research Center, 2022). This dissatisfaction extends beyond governmental bodies to encompass political parties and their representatives.
Another Pew Research study revealed that a record number of Americans hold extremely unfavorable views of the opposing party, with over 70% of Democrats and over 70% of Republicans expressing distrust toward each other (Pew Research Center, 2022). This decline in trust has been mirrored in perceptions of the media, with more Americans reporting no trust at all in media outlets than those expressing confidence. The erosion of trust in these institutions reflects a broader trend of disillusionment with traditional sources of authority and information. When citizens lack faith in their government's ability to address pressing issues and uphold its responsibilities, such as economic management and policy-making, it fosters uncertainty and undermines consumer confidence. Consequently, this skepticism can manifest in cautious spending habits, reluctance to invest, and overall economic stagnation.
The Fed’s Approach to Interest Rates
The Federal Reserve's cautious approach to monetary policy reflects a nuanced understanding of the complexities inherent in managing the economy. By raising interest rates eleven times between March 2022 and July 2023, the Fed sought to address concerns about rising inflation and maintain price stability (U.S. Bank Wealth Management, 2024). However, the decision to pause rate adjustments since then indicates a recognition of the need to carefully assess the impact of previous actions on economic conditions. Federal Reserve Chair Jerome Powell's emphasis on the central bank's readiness to act underscores the importance of flexibility in responding to evolving economic circumstances. The acknowledgment of uncertainty surrounding progress toward the inflation target highlights the dynamic nature of economic indicators and the inherent challenges in forecasting future trends.
Powell's discussion of the risks associated with rate adjustments reflects a thoughtful consideration of the potential consequences of monetary policy decisions. Raising rates too aggressively could stifle economic growth, while failing to raise them sufficiently could exacerbate inflationary pressures (Rugaber, 2023). This delicate balance requires careful deliberation and a nuanced understanding of the interplay between various factors influencing the economy. In the context of the labor market, strong job market indicators often prompt the Fed to consider raising interest rates to prevent the economy from overheating and mitigate inflationary pressures. However, the current scenario poses a dilemma, as high inflation levels suggest a need for rate hikes, but doing so could exacerbate inflation further or even precipitate a recession, especially if the economy is already experiencing inflationary pressures. Conversely, cutting rates to stimulate demand in weak job markets may also worsen inflation.
What Will Happen to the Gap?
The recent decision by the Federal Reserve to maintain interest rates despite slowing inflation has significant implications for the gap between public perception and economic reality. As mentioned, while inflation has been on a downward trend, real interest rates have been rising, potentially widening the disparity between American opinions and economic indicators. This divergence could be further exacerbated if consumers perceive the Fed's policies as ineffective due to factors such as a weak job market or persistently high inflation, which could erode confidence in the central bank’s ability to effectively manage economic conditions.
However, it's essential to recognize that some level of disparity between public sentiment and economic data is normal in a complex economy. While a wide gap may indicate a breakdown in communication or understanding between policymakers and the public, it's not necessarily cause for alarm. Instead, the goal should be to maintain a reasonable level of alignment between public perception and economic indicators, recognizing that complete convergence may not be achievable or desirable.
In my opinion, while the Fed's decision may contribute to a slight widening of the gap between public perception and economic reality, it's unlikely to have severe consequences. Rather than striving for perfect alignment, policymakers should focus on ensuring that economic policies effectively address the needs and concerns of the public while promoting sustainable growth and stability. Ultimately, maintaining a balance between public sentiment and economic indicators is inherent in navigating the complexities of the modern economy.
References
DePillis, Lydia. “Job Market Starts 2024 with a Bang.” The New York Times, 2 Feb. 2024, www.nytimes.com/2024/02/02/business/economy/jobs-report-january-2024.html.
Donovan, Paul. “Opinion | Why Are Voters so Upset? Consider the Snickers Bar.” The New York Times, 18 Jan. 2024, www.nytimes.com/2024/01/18/opinion/inflation-rate-election-voters.html.
Foster, Sarah. “Survey: Recession by July 2024 Likely despite Resilient Economy.” Bankrate, 12 July 2023, www.bankrate.com/banking/federal-reserve/economic-indicator-survey-recession-risks-july-2023/.
Freedman, Eric. “Federal Reserve to Taper Bond Purchases and Raise Interest Rates | U.S. Bank.” Www.usbank.com, 1 Feb. 2024, www.usbank.com/investing/financial-perspectives/market-news/federal-reserve-tapering-asset-purchases.html.
Kochhar, Rakesh, and Stella Sechopoulos. “How the American Middle Class Has Changed in the Past Five Decades.” Pew Research Center, 22 Apr. 2022, www.pewresearch.org/short-reads/2022/04/20/how-the-american-middle-class-has-changed-in-the-past-five-decades/.
Rugaber, Christopher. “Powell Reinforces Fed’s Cautious Approach toward Further Interest Rate Hikes.” AP News, 9 Nov. 2023, apnews.com/article/federal-reserve-powell-inflation-interest-rates-economy-644358701493dacfa4bb4999455684c2.
Schneider, Howard. “US Wage Growth, Once an Inflation Risk, May Be the Prop a Soft Landing Needs.” Reuters, 8 Dec. 2023, www.reuters.com/markets/us/us-wage-growth-once-an-inflation-risk-may-now-be-prop-soft-landing-needs-2023-12-08/. Accessed 17 Mar. 2024.
