Understanding the Disconnect: Why Americans Perceive the Economy Worse Than It Is

Key Points

• Americans feel the economy is in decline, with high food prices impacting their financial state.

• Traditional indicators suggest the U.S. economy is on a path to recovery, with overall inflation at 3.2% in October, down from its peak.

Despite recent polls indicating a negative public perception of the U.S. economy, traditional economic indicators tell a different story. Many Americans, as Thanksgiving approaches, are feeling the economic pressure with rising grocery costs, with 74% reporting that increased food prices are significantly impacting their finances. However, traditional economic measures depict the U.S. economy as recovering post-pandemic, with the overall inflation rate reported at 3.2% in October, a decrease from its peak of 9% in June 2022.

Economists Karen Dynan and Jason Furman provide insights into this discrepancy. According to Furman, the public's focus is on the high price levels rather than the inflation rate. For instance, average food prices have risen 25% since February 2020, causing public concern. Dynan highlights the concept of 'salience' - the visibility and frequent encounter with certain costs, like food and gasoline, elevate their impact on people's perception of inflation. Despite solid economic indicators like GDP, unemployment, and wages, the rapid rise in interest rates and the looming threat of recession contribute to public apprehension.

The situation is further complicated by the global economic landscape. The latest U.S. consumer price inflation report shows a mixed picture with a decline in headline inflation but a stickier core inflation rate. This contrast reflects the Federal Reserve's ongoing struggle to achieve its inflation targets. Long-term investors, however, view this as a temporary phase, with expectations of lower bond yields in the future. The global oil demand outlook remains uncertain, adding to the complexity of economic predictions.

References

1. https://news.harvard.edu/gazette/story/2023/11/why-americans-feel-inflation-economy-are-much-worse-than-they-are/
2. https://www.reuters.com/markets/us/global-markets-view-usa-2023-11-14/