The Matrix of Consumer Discontent

The past two years have been very good for the U.S. economy. Unemployment has crept up a bit, but not by a lot, and the employed share of Americans in their prime working years is higher than, to make a random comparison, it was at any point during the Trump years. At the same time, inflation has come way down, defying the pessimistic predictions of many economists.

Here, for example, is a comparison of the Federal Reserve’s preferred measure of underlying inflation with a September 2022 prediction from Harvard’s Jason Furman — a widely respected economist whom I single out only because he was both very mainstream and admirably explicit (no good deed goes unpunished), predicting that if unemployment remained low, inflation would still be around 4 percent at the end of 2025:

Yet Americans on average remain very negative on the economy. I’ve written about this puzzle many times, and today’s letter isn’t an effort to persuade people that they’re wrong. It is, instead, more of a forensic exercise. There have been many attempts to explain bad feelings about the economy but, as far as I can tell, fewer efforts to compare what, besides poor consumer sentiment, these different stories predict — and how good they are at doing so. So I thought I’d lay out those comparisons in a simple matrix.

As I see it, people trying to explain consumer pessimism basically tell one of three stories:

• The economic data is misleading: Americans are doing much worse than the usual numbers imply.

• Although inflation is way down lately, people are still angry about the 2021-22 surge in prices.

• When asked about the economy, people respond based on narratives they get from social media, cable TV and so on rather than from their own experience.

What, then, are the facts that a story about economic perceptions should explain beyond poor consumer sentiment? I’d single out four observations.

First, while consumer sentiment is weak, consumer spending has remained strong, essentially in line with its prepandemic trend:

Second, Americans are vastly more positive about their personal financial situation than they are about the economy as a whole. Here, for example, are results from a Quinnipiac poll of Wisconsin: