20th November 2023 – (Washington) Despite low unemployment, cooling inflation and continued economic growth, Americans feel glum about their economic prospects heading into a pivotal election year. This presents a quandary for the Biden administration as it tries to highlight its policy successes while relatable financial struggles persist for much of the public. Polls consistently show consumer sentiment and confidence lagging expectations given headline economic data. Explaining this disparity requires looking at how Americans experience their own financial reality versus broad statistics. It also illuminates the difficult position economic messaging poses for Democrats seeking to retain power in 2024.
Viewed through the lens of traditional economic indicators, the U.S. economy appears to be on solid ground as the 2024 campaign picks up. GDP expanded 2.9% in the fourth quarter of 2022, beating expectations. Unemployment remains at a 50-year low of 3.4%. Monthly job gains continue exceeding 200,000, showing employers are still hunger for workers. And most critically, inflation is steadily cooling from 40-year highs last summer. Consumer prices rose 6.4% in January from a year earlier, down from a 9.1% peak in June 2022. Energy and goods inflation are easing back toward pre-pandemic norms as supply logjams resolve. This deceleration encouraged the Federal Reserve to downshift interest rate hikes to 0.25% in February, relieving pressure on growth. Markets rallied on improved economic sentiment, with the S&P 500 up over 7% this year.
The combination of slower inflation, still-robust job gains and consumer resilience has analysts forecasting a soft-landing recession may be avoided. This defies earlier predictions that the Fed’s aggressive rate hikes would trigger a downturn. Yet this relatively encouraging picture hasn’t brightened public attitudes. Gallup’s economic confidence index shows Americans are as pessimistic as during the 2008 financial crisis. Consumer sentiment surveyed by the University of Michigan remains depressed. And polls consistently give Biden low approval on economic management, undermining Democrats’ typical advantage on the issue. This hinders showcasing their policy achievements on jobs, infrastructure, manufacturing and climate investment.
The gap between positive macroeconomic statistics and negative public perceptions stems from the latter better capturing individual financial experiences. People judge the economy based on their own cost of living, income gains and career opportunities rather than GDP or inflation metrics. While prices are off their peak, costs remain substantially elevated for everyday essentials like food, gas, housing and utilities. Grocery prices are up 13.8% over the past year. Rents have risen 7.5% nationally. Gasoline remains expensive at $3.50 per gallon despite retreating from $5 a gallon last summer. These frequent purchases disproportionately impact lower-income Americans’ budgets. Their inflation rate is higher than average because necessities make up a larger share of their spending. Though energy and goods inflation is slowing, services inflation continues rising with wages and rents. This pressures households to get by on stagnant incomes. Real median weekly earnings only grew 0.5% annually over the past three years. Wage growth concentrates among the lowest earners facing the tightest labour market. The majority of workers make too much to benefit but too little to keep pace with costs.Rising interest rates also squeeze family budgets. Credit card rates topping 19% deter discretionary purchases. Mortgage rates, while declining from above 7%, remain nearly double pre-pandemic lows, locking many out of homeownership.
These factors leave most Americans to experience inflation far exceeding pay gains. While aggregate consumer spending remains healthy, many households must save less or incur debt to maintain lifestyles. This personal squeeze belies positive macro trends. The reality that overall statistics provide cold comfort to individuals creates complexity for Democrats’ economic messaging. Exulting strong job growth sounds obtuse for those stuck in place or stretching paychecks.
Touting inflation’s decline from 40-year highs implies 7% ongoing price growth is acceptable. And despite fears, recession talk makes Democrats appear insensitive to financial difficulties that are real, if not dire, for working families. This forces a balancing act between showcasing objective policy results and acknowledging most Americans still feel left behind. Yet the latter risks inadvertently validating negative perceptions.
There are no easy answers, as past strategies show. Stressing downtown’s human impact aims for empathy but reinforces pessimism. Purely positive spins risk appearing out of touch. What messages might connect?
Framing cost relief as ongoing works better than declaring victory. This pairs recent cooling trends with commitments to further improve affordability alongside historically strong job gains. Linking policies like healthcare cost cuts, energy and microchip production, and infrastructure investment highlights actions easing specific household burdens. Their real impact resonates more than abstract statistics. Contrasting these efforts with Republican plans to sunset programs offering relief makes the choice ahead concrete. This engages kitchen table concerns rather than debating macro indicators.
Ultimately, the modest optimism indexes signal leaves little room for complacency in messaging. But the economy’s underlying momentum remains the Democrats’ strongest hand if paired with understanding voters’ continuing pain points.
Despite widespread gloomy sentiment, expert recession predictions for 2023 are retreating as resilient indicators accumulate. Economists surveyed by Bloomberg in January saw a 60% probability of a downturn this year. But some now peg the odds below 50% amid sturdy data.
Most significantly, the Fed’s preferred inflation metric, excluding food and energy, is expected to show meaningful cooling in January data due 24th February. This core PCE inflation gauges service costs most responsive to Fed rate hikes. Its deceleration would indicate the central bank is taming prices without triggering contraction.
Maintaining a still historically-tight labor market also argues against an imminent downturn. Layoff announcements are routine even in strong economies, and remain modest relative to total employment. Job openings still vastly outnumber unemployed workers, preserving bargaining power.
Strong wage and income growth also buoy spending, with savings and credit access preventing sharper pullbacks amid higher rates. Consumers rotate spending from big-ticket items toward necessities and services while trimming savings, avoiding destabilizing demand collapse.
Finally, easing supply chain snarls and freight costs boost production and inventory rebuilding, heading off shortages. And falling commodity prices improve business margins without requiring layoffs. These factors provide resilience absent in past recessions.
Of course risks remain, including new COVID waves, Russia’s war in Ukraine, and potential housing declines as rates rise. Most analysts expect subpar but still positive growth in 2023. Yet barring shocks, the U.S. looks increasingly likely to avoid serious recession through 2024 thanks to the economy’s fundamental momentum.
Rising pessimism paints a gloomier economic picture than statistics support. Nowhere is this clearer than shrinking consumer confidence contradicting still-robust household expenditures. Americans voice sour views on finances but keep spending anyway, confounding slowdown predictions.
The Conference Board’s consumer confidence index sank to 102.5 in January, near a decade low. Two-thirds of respondents called business conditions “bad”—the most negative read since 2013. It appears a deep pessimism has taken hold. Yet household outlays grew a solid 1.4% in January, led by services spending. Retail sales remain healthy outside isolated weak spots like online and furniture. Credit card balances surged 15% last quarter as households lean on plastic amidst rising rates.
This divergence between confidence and expenditures has analysts puzzled. Usually, people cut back savings and debt repayment to maintain spending when confident of income growth. Yet the opposite is occurring now, with gloom accompanied by solid if slower consumption. Falling savings and rising credit card balances are concerning longer-term trends. But for now, they keep consumer demand growing around 2% annually, sidestepping contraction despite sentiment signalling impending pullback.
Several factors likely explain this contradiction. Household balance sheets remain relatively strong after pandemic savings, supporting steady near-term drawdowns. Upward income mobility and wage gains for lower earners also bolster the financial wherewithal of heavy spenders. And embedded behaviours and services reopening continue driving expenditures, from commuting to travel to dining out, despite consumers voicing unease. Addictive e-commerce convenience also persists even amidst belt-tightening.
This presents a complex messaging challenge. Highlighting continued spending risks appearing insensitive to expressed hardship. Yet focusing solely on voiced pessimism obscures underlying household financial capacity providing near-term resilience. Finding the right balance to accurately convey consumer conditions will only grow more crucial as the election approaches. Despite weakness in sentiment, spending remains stable for now, but on an unhealthy trajectory. Capturing these nuances defines leadership.
An enduring mystery shadowing the economy is the fate of “missing workers”—the 2 million or more people who left the labour force during the pandemic and have yet to return. Their absence constrains growth and exacerbates inflation by limiting supply. Yet new research suggests many missing workers never intend to rejoin the labour force at all.
On the surface, this seems puzzling given 1.9 job openings exist for every unemployed American. Employers claim nobody wants to work anymore. But emerging evidence indicates otherwise.
Many missing workers left jobs reluctantly to provide childcare when schools closed. But they have since embraced their new domestic role and derived a sense of purpose unavailable in low-wage occupations. Others accumulated savings during loan pauses and income supports that now enable pursuing education or self-employment.
Millions also retired earlier than planned due to health risks or caregiving needs. With more savings and robust home values, they feel financially secure to leave the workforce for good. And despite labour shortages, few employers make rehiring retired workers appealing.
In essence, missing workers found liberation rather than deprivation in leaving jobs, especially ones lacking flexibility, advancement and respect. Despite fearmongering about dependency, they are relying on their own resourcefulness, not welfare. They represent an indictment of the limited options workers once tolerated.
These revelations expose shortcomings in how labour force participation is interpreted. While too few workers strain the economy, fulfilled people provide social value beyond GDP. Policymakers should focus less on raw numbers than improving job quality to attract those finding purpose outside traditional employment.
The “Great Resignation” was never about laziness but reassessing meaning. Reframing the missing as exploring purpose over idleness or distress better respects the social progress underpinning this transition. Work should empower human flourishing, not inhibit it.
Few sectors are flashing more warning signals than housing amidst the Fed’s aggressive rate hike campaign. Existing home sales have fallen for 11 straight months, with prices also now declining from peaks. Housing starts tumbled in January to the lowest since June 2020. These declines partly correct an overheated pandemic housing boom. But risks are rising that the Fed’s rapid tightening coupled with years of underbuilding tip the market into an excess inventory glut. New home construction led the way down, with starts of single-family houses plunging 12% in January. Permits also signal further declines ahead. Builders are wary of oversupply with sales slowing sharply.
Meanwhile mortgage rates around 6.5%, while down from above 7%, remain nearly triple pre-pandemic lows which fueled unsustainable demand. This erases purchasing power and keeps first-time buyers sidelined.
With inflation also squeezing budgets, fewer households can absorb spiking mortgage payments. Price growth peaked last spring but further declines may unfold with demand weakening.
So far job stability props up the market by keeping distressed sales minimal. But risks mount, especially if unemployment rises, trapping late buyers with unaffordable loans. Rate-induced weakness also drags on related sectors like construction and home goods.
While the post-pandemic hangover brings some normalization, an overly aggressive Fed risks triggering systemic housing stress. The motives behind this softening demand require careful parsing to optimize stability. Fair access to homeownership remains central to family financial health.
Navigating a soft landing depends on credibly conveying both housing’s risks and centrality. Messaging must avoid prematurely declaring victory over inflation before lasting relief assures sustainable growth. Patience remains prudent as the economy’s balancing act continues.
Perhaps the thorniest problem confounding the Fed is how unevenly inflation is evolving geographically, creating complexity in calibrating responsive policy. While national price gauges show steady moderation, regional and sector divergences make further deceleration uncertain. Coastal economies like San Francisco and New York continue experiencing meaningful inflation relief, with falling rents and gas prices erasing earlier spikes. But other areas like Atlanta and Phoenix remain stubbornly hotter than average, driven by runaway housing costs.
Rural inflation also lags urban cool-off. Higher gas and food exposure keeps overall rural price growth about one percentage point above cities. Since rural workers earn less, this imposes disproportionate hardship.
At the same time, services inflation continues accelerating nationally even as goods disinflation offers big-city respite. Stubborn wage-price spirals in labor-intensive sectors like restaurants and hotels resist cooling and risk becoming embedded.
These complexities create dilemmas for the Fed and White House. While Americans need cost of living relief, overtightening could trigger unnecessary recession in already stabilising metros. But restraint risks allowing stubborn inflation in less-prosperous regions to become entrenched.
Messaging must acknowledge these quandaries which defy one-size-fits-all solutions. This means pairing expressions of understanding for those still suffering with nuance about the challenges of aligning policy to disparate local conditions. There are no easy answers, only responsible choices weighed carefully.
As election season accelerates, Democrats face vexing dilemmas translating economic data into relatable messages. Americans remain downcast despite mounting evidence of resilience and moderation in inflation’s grip. This paradox of reality versus perception results directly from the unevenness of recoveries. Aggregate statistics obscure lingering strain on family budgets from elevated costs for non-discretionary essentials and rising interest rates. Yet outright pessimism or mixed messages risk becoming self-fulfilling prophecies. The solution lies in explaining challenges and tradeoffs while still championing substantive gains made. Conveying nuance, compassion and determination defines serious leadership.
With thoughtful communication, Democrats can craft narratives that resonate with Americans’ complex experiences. The president in particular must avoid facile claims of “mission accomplished” on inflation which ring hollow. But neither should he concede a faltering economy that data doesn’t support.
