Who Cares What You Think? A Challenge to the Economic Paradigm of Consumer Thought

How’s the economy doing these days? It depends on who you ask. A poll jointly conducted by the Suffolk University Sawyer Business School and USA Today published September 13 found that “Nearly 70% of US residents say the economy is getting worse, not better.” When prompted to share words they would use to describe the economy, respondents offered adjectives such as “horrible,” “awful,” “bad,” and “[in] shambles.” An AP poll conducted August 10-14 reported that just 34% of Americans describe the economy as “very or somewhat good,” adding that “No more than about a third of Americans have called the economy good since 2021.”

Consumers are no more optimistic about themselves than they are about the economy writ-large. An April 2023 study by Gallup found that a slight majority (55%) of Americans assessed their personal financial situation as “only fair/poor,” a significant decline from years previous, particularly 2021. The aforementioned USA TODAY poll also found that 84% of Americans say that their cost of living is rising, while also stating that they planned to cut back on spending across the board: “More than 71% said they are going out to eat less often. They are dialing back spending on clothing purchases (68%), groceries (53%), vacations (58%), and canceling or delaying home improvements (57%).”

The opinion of Americans is unmistakable: the economy is poor, and they are being forced to make uncomfortable decisions as a result. Most Americans are not, however, economists; and professional economists do not share such a negative opinion of the economy as of late. An August survey conducted by the National Association for Business Economics found that more than two-thirds of its 167 members thought that the economy would avoid a recession, while three-fourths thought that the actions taken by the Fed to slow inflation had gotten it “about right.” Furthermore, a late August publication by the Federal Reserve Bank of St. Louis stated that “Earlier this year, a short, mild recession was the baseline forecast for many economists, including staff at the Federal Reserve Board of Governors. However…many forecasters no longer expect a recession this year.”

Arguably the best evidence of the prevailing professional economic optimism (or, perhaps, lack of pessimism) is the recent decision of the Fed not to raise interest rates. The Fed typically raises rates to encourage saving and discourage spending, thereby slowing inflation. While the policymakers at the Fed signaled that they expect to raise rates once more before the end of 2023, they are optimistic that they will reduce inflation to the target rate of 2% while avoiding a recession, a scenario that has been referred to by many as a “soft landing.” 

To summarize, consumers are decidedly pessimistic about the immediate state and future of the economy, but economists are decidedly less so. This reality defies logic, given that consumer behavior is ultimately a key component of the economy, accounting for more than two-thirds of U.S. economic activity. If consumers were acting as pessimistic as they sound, it would follow that there would be a huge decline in spending. That has yet to happen, as described by Reuters in a late August analysis of economic data: “…real consumer spending rose 0.4% in June. [July’s] solid increase put real consumer spending on a higher growth path at the start of the third quarter, prompting economists to raise their gross domestic product estimates.” We might also expect unemployment to rise if businesses cut back on spending in a scenario where they, like consumers, expected a recession in the near future, but that also hasn’t happened: the Bureau of Labor Statistics’ measure of unemployment for August 2023 clocked in at 3.8%, remaining near its historic lows as of late. 

This dissonance has not always existed, especially in recent memory. Consumer opinion has typically been fairly reflective of the true state of the economy. Below is a graph of net approval of the state of the economy as tracked by Civiqs versus percent real GDP per capita growth (multiplied by 10 for scale):

Data sources: Civiqs public opinion tracking and the Federal Reserve’s GDP numbers

Real GDP growth, except for the spikes in 2020 due to the pandemic, has been consistent over the past eight years. Net approval of the economy, which had long been mired in the negatives, owing to the slow post-Great Recession recovery, turned positive at the start of 2016 and remained there for nearly four full years. Since then, however, negative sentiment has not only reached new lows, but has done so despite steady economic growth. The data shows that we are in an unusual moment: the disparity between consumer opinions of the economy and the economy’s state itself has rarely, if ever, been larger. 

How can all of this be the case? There are a few possible explanations, starting with the ways in which consumers have a right to complain. Nominal wage growth has, until recently, not kept pace with inflation, meaning that real wages have actually decreased and real prices have increased:

Data sources: Bureau of Labor Statistics CPI tracking and the Economic Policy Institute. Note that the wages shown are nominal private-sector average hourly rates and do not include public-sector wages.

This is alarming and likely explains a good amount of consumer dissatisfaction. With wage growth outpacing inflation as of late, consumer sentiment may rebound. However,there are reasons to be skeptical about this—even if wages do outpace inflation, most goods will not see their nominal prices return to pre-pandemic levels. Hence, it may not feel like inflation has come to an end.

This traces back to the earlier point regarding consumers not being economists. New York Times columnist Peter Coy noted in a recent discussion that a study indicated that 57% of people incorrectly think that increased interest rates cause inflation rather than correct them. Though they are wrong, there is some intuitive logic to this: interest rate hikes typically are accompanied by higher debt payments. With still-high nominal prices in one hand and higher debt payments in the other, consumers would be forgiven for thinking that the economy was in a bad spot. 

Some explanations that are more on the anecdotal side may also shed light on these unusual circumstances. Partisanship is also playing a large role in public perceptions: A CBS poll from mid-August saw 52% of Democrats describe the condition of the economy as “good,” compared to just 15% of Republicans. Civiqs’ ongoing aggregation of public opinion polls has Democratic approval (that is, describing the economy as “very good,” “somewhat good,” or some equivalent) of the economy at 63%, with Republican approval at a paltry 4%. Independents, unsurprisingly positioned between the two major parties, are at 25% approval. 

Perhaps the most compelling explanation for the current odd state of affairs is that no one really knows exactly what to think. The sheer authority with which economists were predicting a recession in the past year may have led many to believe in one’s inevitability, as was suggested by Derek Thompson of the Ringer and Jason Furman, a Harvard economist. Economists, not known for being oracles, are at a loss, as Furman describes: “…forecasters basically never forecast a recession, and then sometimes they happen. This time, they forecast a recession, and one didn’t happen…I too am surprised by the economy.” Consumers themselves, though adamant about the poor state of the economy, have consistently reported lower expectations for future inflation in surveys as of late. While consumers are clearly not to be taken entirely at their word, the Fed itself has revised its estimates of inflation and unemployment multiple times over as of late. 

These are unprecedented times, as Nobel Prize-winning economist Paul Krugman argued in a July piece questioning the recession that never was. Krugman noted that the coronavirus pandemic caused several structural changes to the economy, such as an increased demand for housing that resulted from the rise in remote work. He also mentioned that the investment of the Biden administration in domestic manufacturing through the CHIPS and Science Act, among others, could be behind some of the economic resilience. Other potentially extraneous and confounding variables include Russia’s ongoing war with Ukraine and the continued aftershocks of the supply chain issues that arose during the pandemic

Much about our current economic situation has no clear historical analogue. It is likely that some of the changes that took place during the pandemic will have lasting aspects, such as remote work, shifts in worker power/union trends, and the rise of generative AI. In that vein, it may well be that consumer opinions will be less in line with economic reality than has historically been the case. We cannot, however, disregard the uncertainty that would prudently be a component of this assessment. The relationship between the two will certainly be worth watching going forward, but it cannot be declared to have fundamentally changed yet.


This article was edited by Isabella Valentino.