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Inflation has created a dark cloud over how everyday Americans view the economy

December 26, 2023
in General
Inflation has created a dark cloud over how everyday Americans view the economy
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Grocery items are offered for sale at a supermarket on August 09, 2023 in Chicago, Illinois.

Scott Olson | Getty Images

When Kyle Connolly looks back at 2023, she sees it as a year defined by changes and challenges.

The newly single parent reentered the workforce, only to be laid off from her job at a custom home-building company in November. At the same time, Connolly has seen prices climb for everything from her Aldi’s grocery basket to her condo’s utility costs.

In turn, she’s cut back on everyday luxuries like eating out or going to the movies. Christmas will look pared down for her three kids compared to years prior.

“I’ve trimmed everything that I possibly can,” said the 41-year-old. “It sucks having to tell my kids no. It sucks when they ask for a little something extra when we’re checking out at the grocery store and having to tell them, ‘No, I’m sorry, we can’t.'”

Economic woes have seemed more apparent within her community in Florida’s panhandle. Connolly has noticed fewer 2022 Chevy Suburbans on the road, replaced by older Toyota Camry models. The waters typically filled with boats have been eerily quiet as owners either sold them or tried to cut back on gas costs. Fellow parents have taken to Facebook groups to discuss ways to better conserve money or rake in extra income.

The struggles among Connolly and her neighbors highlight a key conundrum puzzling economists: Why does the average American feel so bad about an economy that’s otherwise considered strong?

‘High prices really hurt’

By many accounts, it has been a good year on this front. The annualized rate of price growth is sliding closer to a level preferred by the Federal Reserve, while the labor market has remained strong. There’s rising hope that monetary policymakers have successfully cooled inflation without tipping the economy into a recession. 

Yet closely watched survey data from the University of Michigan shows consumer sentiment, while improving, is a far cry from pre-pandemic levels. December’s index reading showed sentiment improved by almost 17% from a year prior, but was still nearly 30% off from where it sat during the same month in 2019.

“The main issue is that high prices really hurt,” said Joanne Hsu, Michigan’s director of consumer surveys. “Americans are still trying to come to grips with the idea that we’re not going back to the extended period of low inflation, low interest rates that we had in the 2010s. And that reality is not the current reality.”

Still, Hsu sees reason for optimism when zooming in. Sentiment has largely improved from its all-time low seen in June 2022 — the same month the consumer price index rose 9.1% from a year earlier — as people started noticing inflationary pressures recede, she said.

One notable caveat was the drop in sentiment this past May, which she tied to the U.S. debt ceiling negotiations. The 2024 presidential election has added to feelings of economic uncertainty for some, Hsu said.

Inflation vs. the job market

Continued strength in the labor market is something economists expected to sweeten everyday Americans’ views of the economy. But because consumers independently decide how they feel, jobs may hold less importance in their mental calculations than inflation.

There are still more job openings than there are unemployed people, according to the latest data from the Bureau of Labor Statistics. Average hourly pay has continued rising — albeit at a slower rate than during the pandemic — and was about 20% higher in November than it was in the same month four years ago, seasonally adjusted Labor Department figures show.

That’s helped boost another widely followed indicator of vibes: the Conference Board’s consumer confidence index. Its preliminary December reading was around 14% lower than the same month in 2019, meaning it has rebounded far more than the Michigan index.

While the Michigan index compiles questions focused on financial conditions and purchasing power, the Conference Board’s more closely gauges one’s feelings about the job market. That puts the latter more in line with data painting a rosier picture of the economy, according to Camelia Kuhnen, a finance professor at the University of North Carolina.

“You think that they’re talking about different countries,” Kuhnen said of the two measures. “They look different because they focus on different aspects of what people would consider as part of their economic reality.”

A hot job market can be a double-edged sword for sentiment, Michigan’s Hsu noted. Yes, it allows workers to clinch better roles or higher pay, she said. But when those same workers put on their consumer hats, a tight market means shorter hours or limited availability at their repair company or veterinarian’s office.

Silver linings for some

Other reasons why consumers feel positively about the economy this year can only be true for certain — and often wealthier — groups, economists say.

UNC’s Kuhnen said Americans would be pleased if they are homeowners seeing price appreciation. Another reason for optimism: If they had investments during 2023’s stock market rebound.

Without those cushions, people on the lower end of the income spectrum may feel more of a pinch as higher costs bite into any leftover savings from pandemic stimulus, Kuhnen said. Elsewhere, the resumption of student loan payments this year likely also caused discontent for those with outstanding dues, according to Karen Dynan, a Harvard professor and former chief economist for the U.S. Treasury Department.

Consumers are under real strain, says Morgan Stanley's Chris Toomey

Marissa Lyda moved with her husband and two kids to Phoenix from Portland earlier this year, in part due to lower housing costs. With profits from the value gained on the property she bought in 2019, her family was able to get a nicer house in the Grand Canyon state.

Yet she’s had to contend with an interest rate that’s more than double what she was paying on her old home. Though Arizona’s lower income tax has fattened her family’s wallet, Lyda has found herself allocating a sizable chunk of that money to her rising grocery bill.

The stay-at-home mom has switched her go-to grocer from Kroger to Walmart as value became increasingly important. She’s also found herself searching harder in the aisles for store-brand food and hunting for recipes with fewer ingredients.

Her family’s financial situation certainly doesn’t feel like it reflects the economy she hears experts talking about, Lyda said. It’s more akin to the videos she sees on TikTok and chatter among friends about how inflation is still pinching pocketbooks.

“I look at the news and see how they’re like, ‘Oh, best earnings, there’s been great growth,'” the 29-year-old said. “And I’m like, ‘Where’s that been?'”

‘Just trying to hold on’

Economists wonder if social media discourse and discussion about a potential recession have made Americans think they should feel worse about the economy than they actually do. That would help explain why consumer spending remains strong, despite the fact that people typically tighten their belts when they foresee financial turmoil.

There’s also a feeling of whiplash from the runaway inflation that snapped a long period of low-to-normal price growth, said Harvard’s Dynan. Now, even as the annual rate of inflation has cooled to more acceptable levels, consumers remain on edge as prices continue to creep higher.

“People are still angry about the inflation we saw in 2021 and, in particular, 2022,” Dynan said. “There’s something about the salience of … the bill for lunch that you see every single day that just maybe resonates in your brain, relative to the pay increase you get once a year.”

Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., December 13, 2023. 

Kevin Lamarque | Reuters

Another potential problem: The average person may not completely understand that some inflation is considered normal. In fact, the Federal Reserve, which sets U.S. monetary policy, aims for a 2% increase in prices each year. Deflation, which is when prices decrease, is actually seen as bad for the economy.

Despite these quandaries, economists are optimistic for the new year as it appears increasingly likely that a recession has been avoided and the Fed can lower the cost of borrowing money. For everyday Americans like Connolly and Lyda, inflation and their financial standing will remain top of mind.

Lyda has cut treats like weekly Starbucks lattes out of the budget to ensure her family can afford a memorable first holiday season in their new home. In 2024, she’ll be watching to see if the Fed cuts interest rates, potentially creating an opportunity to refinance the loan on that house.

“You just have to realize that every season of life may not be this huge financial season,” Lyda said. “Sometimes you’re in a season where you’re just trying to hold on. And I feel like that’s what it’s been like for most Americans.”

>>> Read full article>>>
Copyright for syndicated content belongs to the linked Source : CNBC – https://www.cnbc.com/2023/12/25/inflation-has-created-a-dark-cloud-over-how-everyday-americans-view-the-economy.html

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