Anger about the economy is everywhere

Inflation is out of control, the US is in a recession, and unemployment is high--at least that's what "the survey says." Or is it?

Source: Getty Images.

Heartfelt gratitude to every man and woman who is serving or is a US military veteran. This year, we lost the last member of our immediate family who served. RIP, Uncle John.

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We have much more work to “form a more perfect Union,” and, at the same time, we have much to be thankful for. I am thankful for our rapid, strong recovery from the Covid recession. That’s my opinion, and it’s clear many Americans do not share it.

In today’s post, I again try to unpack the anger about “the” economy.

A wave of new surveys shows that most Americans say the economy is awful. I have argued that the extra gloominess is due to the trauma of Covid and the disruptions it caused to our lives. I have also discussed the way social media is amplifying what had always been the media’s bias to the negative. I have also taken a different angle and shared what people say about their lives. Most Americans are better off financially than before the pandemic. Here we go again.

Words matter.

This weekend, Felix Salmon at Axios published a piece on what people mean when they say inflation.

The meaning of the word "inflation" has changed. It used to mean rising prices; now it means high prices.

Why it matters: Pedants, economists, and style-guide editors might not like it, but if you want to understand what people mean when they complain about inflation, you need to understand how the vernacular has evolved over the past couple of years.

No. Words have meaning. Here is the definition of inflation:

We can discuss whether people care more about the increase in prices (inflation) or the level of prices, but the level of prices is NOT inflation.

Inflation has been notably higher during the past three years than in several decades. That, all else equal, would weigh down sentiment in normal times. However, all else is not equal, and an extremely strong labor market and record-setting stock market would push up sentiment in normal times. We are not living in normal times. Consumer sentiment has been awful.

Wait, what’s that you say? It’s not inflation. It’s the level of prices that people are about. Let’s look at the price level, comparing now to the 1970s. And as Felix Salmon said, let’s look at the price rise not just one year but since inflation picked up in 2021.

Prices rose 15% from March 2021 to March 2024—about half the increase from March 1977 to March 1980 .¹ Sentiment is not half as bad as then. It’s as bad.

Moreover, inflation stayed high for several years in the 1970s. The rate at which prices are increasing (inflation) has slowed a lot in the past year. Notice how the orange line is flattening out, and the blue keeps moving up.

The labor market in the late 1970s was worse than now: the unemployment rate averaged over 6% from 1977 to 1979. (Other periods were even worse.) In contrast, the unemployment rate averaged 4% during the last three years. (The last two of those were well below 3.6%.) A smaller increase in the price level with a much lower unemployment led to the awful sentiment. What?

It’s not “the” economy, stupid.

Even if they have precise definitions, concepts like inflation, a recession, or the economy are somewhat abstract. It would be understandable for people to project their views, concerns, and feelings onto them. The sentiment surveys provide evidence of that behavior.

Since 2017, roughly three-quarters of adults have described their own finances as “doing okay” or “living comfortably” in the Survey of Household Economics and Decisionmaking. In 2022 and 2023, this fraction was somewhat below the pre-pandemic levels, but the share was still a resounding majority of Americans.

However, as we zoom out, people are not as upbeat. Before the pandemic, about two-thirds of people said their local economy was “good” or “excellent.” It took a marked turn down in 2020 with the pandemic's start and has hovered around 40% since then.

Views on the national economy are bleak. About half of people in the two years before the pandemic said the national economy was “good” or “excellent.” In 2020, it nose-dived to about one-quarter of the people and remains depressed. That’s a 50 percentage-point gap in 2023 between own finances and the national economy. The survey is nationally representative of US adults; these assessments should align somewhat. They do not. Not at all.

When you look at the chart, what’s the first thing you see? I see Covid. The big divergence in these assessments came in 2020, well before inflation shot up. You can see the imprint of inflation, but relatively speaking, the big hit to our optimism came in 2020. The pandemic was a huge blow, and we are still working through it.

You can have your own opinions but not your own facts.

The pessimism about the national economy shows up in many surveys, including ones that ask about specific concepts like a recession, the stock market, and unemployment. Here is a description of a Harris poll for the Guardian:

• 55% believe the economy is shrinking, and 56% think the US is experiencing a recession, though the broadest measure of the economy, gross domestic product (GDP), has been growing.

• 49% believe the S&P 500 stock market index is down for the year, though the index went up about 24% in 2023 and is up more than 12% this year.

• 49% believe that unemployment is at a 50-year high, though the unemployment rate has been under 4%, a near 50-year low.

The gap between people’s assessments and reality is huge. Do not dismiss aggregate statistics as not capturing people’s lived experiences. For example, the national unemployment rate estimates come from the Current Population Survey, a large survey of people. Every person counts the same, and it adds up. Less than 4% of people tell us they are looking for work and cannot find any. That’s very low, thankfully.

The best I can do here is say that people are angry and scared of what’s around the corner. They are constantly told that they should be angry and scared. When asked about basic economic facts, they blast all that anger and fear at the questions.

In closing.

Surveys bring the voices of regular people into the study of the economy and economic policymaking. They are essential for capturing the range of Americans’ experiences. It is as valid to ask someone whether they are unemployed as it is to ask them how many other people they think are unemployed. Even so, it’s important not to pretend that everything people tell us about the economy is about the economy.

1. I use the Personal Consumption Expenditure prices because, unlike the CPI, they are methodologically consistent over time, including the treatment of Owners’ Equivalent Rent. The basic point would be the same with the CPI, though the values differ.