Economic sentiment and President Joe Biden’s approval ratings are low despite strong output and employment growth for reasons both obvious and subtle.
The public is gloomy about the state of the economy even though two of the most important measures of economic health are strong — namely, GDP growth has been strong in recent quarters, and the employment rate is high by historical standards.
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For example, the University of Michigan’s Index of Consumer Sentiment fell to 61.3 this month. That’s better than it was last year during the worst of the inflationary bout, but still low by historical standards. It’s well lower than it was, for example, when unemployment was as low as it is now, 3.9%, in December 2018.
Similarly, Biden is deeply underwater in terms of approval ratings on the economy, with disapproval near 60% in the RealClearPolitics average of polls.
Here’s why the public is unhappy:
THE OBVIOUS REASON: PRICES ARE HIGH
Prices were 18% higher in October than they were in October 2020, according to the Consumer Price Index.
In recent months, inflation has fallen from as high as 8.9% year-over-year in June 2022 to 3.2% in October. The White House has touted the decline in the inflation rate, and overall economic sentiment has improved as it has come down. Over the past year, average hourly earnings have outpaced inflation, according to the Bureau of Labor Statistics.
Still, a decline in the rate of inflation means that prices are still rising — just more slowly. Many households are still facing hardship because prices shot up so fast in recent years.
That’s especially true for the prices of goods that people buy frequently, and thus likely feed into their perception of overall price pressures.
Most notably, grocery prices are up more than 20% over the past three years, according to the CPI. Recent research suggests that grocery prices play an outside role in shaping perceptions of inflation.
Gas prices, which commuters see at the pump several times a month, are up 66%.
Erik Lundh, a principal economist at The Conference Board, which puts out a closely watched index of consumer confidence, said that people are focused on prices and costs and that groceries and gas are top-of-mind.
“It takes a while to get used to new price levels,” he said.
A NOT-SO-OBVIOUS REASON: INTEREST RATES
One major non-obvious factor depressing economic sentiment is that higher interest rates are putting some purchases out of reach for households.
The average rate on a 30-year fixed-rate mortgage is 7.44%, according to the latest data from Freddie Mac, up from 3.22% at the start of 2022. The average mortgage payment on a new home has nearly doubled from 2020, creating an affordability crisis.
Similarly, rates for auto loans and credit cards have shot up in recent months as the Federal Reserve has raised its interest rate target in a bid to arrest inflation.
In other words, while prices for big-ticket items may not be rising as fast as they were in previous months, they’re still becoming less affordable because finance costs are going up.
The effects of higher interest rates have been clearly reflected in indices of sentiment.
In the Conference Board Consumer Confidence index, the number of respondents saying they planned to buy a home in the next year plunged by roughly 50% from October 2022 to October 2023, Lundh noted, a sign of interest rate costs weighing on households (although that metric does not feed directly into the overall index).
A NOT-SO-OBVIOUS REASON: REPUBLICAN ANGST
Republicans seem to be disproportionately unhappy about the economy, dragging down overall measures of sentiment.
The University of Michigan survey breaks out sentiment by partisanship. While sentiment improved among Democrats first as the country emerged from the pandemic shutdowns and then again as inflation has abated, independents still aren’t feeling as good as they were pre-pandemic — and from Republicans’ point of view, the country is still in a terrible recession.
It’s not unusual for people to be less happy about the state of the country when their party is out of power. But Republican sentiment appears to be more sensitive to partisan control of the White House. An analysis by former Biden White House economists found that overall sentiment is lower than what might be expected based on economic fundamentals and that disproportionate GOP unhappiness explained about a third of the difference.
A NOT-SO-OBVIOUS REASON: THE PANDEMIC CHANGED EVERYTHING
The pandemic uprooted life for almost everyone and led to far-reaching changes in commerce and day-to-day life. The changes are so wide-ranging that it is possible that, for example, a 3.9% unemployment rate today is not the same as it was four years ago before the pandemic. The circumstances around today’s low unemployment might be overall less favorable than back then, whether it’s because of the loss of a small business, changing expectations about working from home or in an office, or a thousand other differences.
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“I do still believe it is a reasonable hypothesis that consumer sentiment underwent a structural change during the pandemic,” said Yongchen Zhao, an economist at Towson University. “And it is not unfair to believe that an entire generation of consumers may have become permanently less optimistic after the pandemic.”
Zhao, who has published research on the determinants of consumers, noted the changes in the economy that could have played a role in the shift. For instance, restaurants and retail have continued to find their footing in the post-pandemic era while the tech sector has prospered.