The Mystery of the Consumer Economic Disconnect

According to The Economist, the United States economy is the envy of the world:

But not according to the typical U.S. consumer.

The Consumer Economic Disconnect

Traditionally, consumers’ opinions about the economy track its actual state. So, since growth is sufficiently robust, unemployment is low, inflation is under control, and equity markets are soaring, then most of us should feel good.

But we don’t.

Explaining why, Brookings said there were three reasons:

• “The Lasting Impact of Inflation”
• “Media Bias and Misinformation”
• “Political Biases”

Inflation:

Although our wages have outpaced inflation during the past 4 years, we don’t believe the numbers or if they could continue. It all relates to a fundamental dislike of rising prices. However, the negativity usually is not as intense nor does it last this long. One reason could be that, when asked, survey participants said the inflation rate was 7.1% when it was 3.4%. Furthermore, they expected it to continue at an elevated rate of 6.3%–far higher than the experts forecast.

In addition, it’s not inflation that we care about. It’s prices. Whereas prices rose by 2.6% this year, they are up 22% since 2020. We should though be acclimating to the new prices. Economists tell us that our response to inflation “decays” annually by 50%. Remembering that inflation peaked in 2022, we should have calmed somewhat:

The second and third reasons, however, show why we remain disturbed.

The Media:

Recent studies indicate that the economic news has become increasingly negative. Comparing consumer sentiment to economic news, one index from the San Francisco Fed cited a gap. Then, further exacerbating the divide, another study observed that only high gasoline prices made the headlines–not the low ones:

Politics

And finally, as we noted in a previous post, politics plays its part. When someone’s political party wins, they see the economy through a rosier lens. But because Republicans experience a more extreme sentiment shift when Democrats win, we don’t wind up with a balance. The tilt is negative.

Our Bottom Line: Inaccuracy

The one thread that runs through the three reasons for a disconnect between consumer sentiment and economic data is misinformation. I just wish more people became economically literate. Then, having solved the mystery, we could narrow the consumer economic disconnect.

My sources and more: For today, showing the consumer economic disconnect, Brookings and The Economist were the perfect complements.