The mismatch in US economy perception versus reality: McGeever

By Jamie McGeever

ORLANDO, Florida (Reuters) -As President Joe Biden and former President Donald Trump prepare to face off in the first of the 2024 presidential debates, the gulf between Americans' downbeat view of the U.S. economy and its general healthy well-being could not be wider.

A year after the Federal Reserve's most aggressive interest rate hiking campaign in four decades, the economy is in remarkably good shape - unemployment has not been this low for this long since the 1960s, real wages are rising, and GDP growth is above trend.

Wall Street, not always the Democrats' most natural ally, seems to agree - a potentially transformative boom in tech is in full swing, equity volatility and credit spreads are historically low, and the stock market has never been higher.

So why is Wall Street's view not shared by Main Street? Surveys consistently show Americans are pessimistic on the economy at large, and a Reuters/IPSOS poll this week showed Trump beats Biden 43% to 37% on who has a better approach for the economy.

The answer definitely has a lot to do with inflation, and probably a bit to do with political polarization widened by social media-fueled populism, misinformation and fear-mongering.

"The macroeconomic story is strong. But there is a huge disconnect between reality and people's perceptions, which points to a lot of misinformation about the economy," says Heidi Shierholz, the president of the Economic Policy Institute in Washington.

"It's that one-two punch of high price levels from the burst of inflation, and misinformation," she adds.

POLARIZATION

The effect of 'higher-for-longer' inflation on people's perceptions cannot be overstated.

A working paper titled "Why Do We Dislike Inflation?" that was published in March by Stefanie Stantcheva, a professor of political economy at Harvard University, shone a bright light on the economic, behavioral and emotional damage people feel that inflation inflicts.

The paper, built on a seminal study in 1997 by Robert Shiller, found inflation is "deeply rooted in its perceived impact on (people's) financial well-being and the broader economy," is distributed unevenly, and exacerbates inequality.

Minneapolis Fed President Neel Kashkari told the Financial Times earlier this month that he's hearing increasing anecdotal evidence that people would rather have a recession than high inflation - if they lose their job, they can get help from friends or family, but everyone is affected by inflation.

That idea goes against academic studies that show recession and unemployment are more painful than rising prices. Danny Blanchflower, a professor at Dartmouth College and a former Bank of England rate-setter, estimates a rise of 1 percentage point in the unemployment rate lowers well-being by more than five times as much as an increase of 1 percentage point in inflation.

Stantcheva's paper, meanwhile, also highlighted "the distinct polarization in opinions on inflation based on political affiliation," which is no doubt wider today than it was in 1997.

Asked who or what is to blame for current inflation, the replies were instructive. Republicans were twice as likely than Democrats to blame "Biden and the administration," "Monetary policy" and "Fiscal policy," with 41% of Republicans citing these three factors, versus Democrats' combined 21%.

'SYSTEMATIC BIAS'

Yet although inflation is still above the Fed's 2% goal, it is not far off it. Indeed, the steep decline in inflation from the post-pandemic peak near 10%, as measured by the consumer price index, has boosted average real wages, which have now been growing for more than a year.

An EPI study in March found that real hourly wages for the lowest 10% of earners grew 12.1% between 2019 and 2023. In the same period, middle-wage workers experienced 3.0% real wage growth, while the wages of the top 10% of earners grew just 0.9%.

This apparent disconnect between people's personal attitudes to inflation and the wider aggregate picture is to a certain extent mirrored in people's perceptions of their personal financial well-being against the nation's.

A recent Gallup poll showed a slight uptick in the "Personal Financial Situation Index" last year, in how people felt versus a year earlier and how they see themselves in a year's time.

But Americans' current assessment of national economic conditions slipped to the most negative since November, and has been negative nearly every single month since March 2020. What gives?

Research published by the Brookings Institution earlier this year found that "biased sources of information" and a "systematic bias in driving inaccurate perceptions about U.S. economic performance" in the media are partly to blame.

While this may not be an entirely new phenomenon, it helps explain why many people wrongly believe the U.S. economy is in recession and why consumer sentiment "appears to be divorced from the macroeconomy."

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Paul Simao)