When he delivered his State of the Union address in March, Joe Biden framed the state of the American economy as a true success story, pointing to the historically low unemployment rate and falling inflation as signs of the country’s robust recovery from the early days of the coronavirus pandemic.
“I inherited an economy that was on the brink. Now, our economy is literally the envy of the world,” the US president said. “And it takes time, but the American people are beginning to feel it.”
As Biden frequently boasts, 15m jobs have been created since he took office, and the unemployment rate now stands at 4% after 41 consecutive months of job gains, following the longest stretch of sub-4% unemployment since the 1960s. Inflation has also cooled, after the annual consumer price index hit a peak of 9.1% in June 2022. Stock markets have hit new highs, with the Dow Jones industrial average passing 40,000 points for the first time ever. The International Monetary Fund predicted last month that the US economy was on track to grow at double the rate of any other G7 nation this year.
But so far, many Americans are not buying what Biden is selling. According to a Harris poll conducted for the Guardian last month, 56% of Americans wrongly believe that the US economy is in a recession, even though the country’s GDP has grown in recent months. Republicans were more likely to hold that belief, with 67% of them saying the economy is in a recession compared with 49% of Democrats and 53% of independents.
The survey continued a trend of Republicans reporting higher levels of pessimism about the nation’s finances since Biden took office. But the relationship between political identity and consumer sentiment has actually been documented for decades, intensifying alongside partisanship in recent years.
This political bias offers a partial – although far from complete – explanation for Americans’ persistently dour opinions of the nation’s finances. In recent weeks, the Guardian has dispatched reporters to key swing counties in battleground states, and voters representing a wide array of political views expressed disappointment with the higher cost of living.
As LeMario Brown, a former city council member in Fort Valley, Georgia, and local pecan farmer, said: “It doesn’t matter if we’re Republican or Democrat, we all got to eat.”
With less than five months left before election day, Biden must find a way to break through the gloom and sell his vision of economic success.
A partisan split
The partisan skew in perceptions of the economy dates back at least to the Reagan administration, as the University of Michigan’s national consumer confidence data shows. With a Republican in the White House, Republicans are much more likely than Democrats to say the economy is strong, and the same principle applies when a Democrat takes office.
Though the correlation between political identity and consumer sentiment has long been recognized by economists, it appears to have grown stronger in recent years. One study from the University of Florida, based on decades of data from the Florida Consumer Attitude survey, found that state residents reported notably higher levels of consumer confidence after their preferred party regained control of the White House. In the fall of 2016, after Trump won the presidential race, Republicans started expressing much more optimism about their personal finances.
“Over time, [these shifts] have gotten bigger and bigger* … It’s true that, somehow, this kind of partisanship has been increasing,” said Hector Sandoval, director of the economic analysis program at the University of Florida’s Bureau of Economic and Business Research.
Sandoval noted that, in 2016, the shift in sentiment can be observed in the immediate month after Trump won the election in November, even though he did not take office until January.
“That’s even kind of striking because nothing has really happened [by this time],” Sandoval said. “The change in power isn’t until the next year, in January. But already by then you see how the consumer sentiment is changing a lot.”
Although Democrats’ consumer attitudes have also been found to vary depending on the national political environment, Sandoval’s research found this shift to be particularly pronounced among Republicans, a finding that has been corroborated by other studies. Ryan Cummings, who previously worked for Biden’s council of economic advisers, and Neale Mahoney, who served as an adviser to the Biden administration’s national economic council, refer to this pattern as “asymmetric amplification”.
According to an analysis by Cummings and Mahoney, the magnitude of the partisan bias on consumer sentiment is roughly two and a half times larger for Republicans compared with Democrats. In a phone call, Mahoney, now an economics professor at Stanford University, summarized the finding by saying that Republicans “cheer louder and boo harder” when their party controls the White House.
Cummings and Mahoney found that this asymmetric amplification accounts for roughly a third of the gap between predicted consumer sentiment, based on current economic conditions, and observed consumer sentiment. In the Harris poll, Republicans were indeed more likely to incorrectly say that the economy is in a recession, but notably, nearly half of Democrats believed the same.
So even when accounting for partisan bias, about two-thirds of the consumer sentiment gap remains. That has left economists – and many frustrated members of Biden’s team – searching for answers.
Beyond the politics
Potential explanations for consumers’ lingering pessimism have abounded as election day nears. Greg Ip, a Wall Street Journal columnist, has attributed the pessimism to what he calls “referred pain”, meaning Americans are casting their broader doubts and fears about the state of the world on to the economy.
“Just as one part of your body can hurt because of injury to another, pessimism about the economy may reflect dissatisfaction with the country as a whole,” Ip wrote in November. “Lately, there has been a lot to be dissatisfied about: intensifying political and cultural conflict and intolerance, the pandemic, the border, mass shootings, crime, war in Ukraine and now the war in the Middle East.”
Another explanation touches on the role of the media, with some experts arguing that coverage of the economy has become skewed toward bad news. One recent study from Ben Harris and Aaron Sojourner of the Brookings Institution concluded that “economic news has become systemically more negative beginning in 2018, with the negative bias growing over the past three years”.
A third school of thought addresses the long-term pain and general psychology around inflation. Although the most recent CPI data found that prices rose by 3.4% over the past 12 months, prices have increased by roughly 20% since 2019. So even as the rate of inflation has fallen, Americans are still adjusting to the overall rise in the cost of living over the past few years. Prices also show no sign of significantly decreasing, a phenomenon known as deflation that is generally associated with times of severe economic distress.
A separate analysis from Cummings and Mahoney found that “the impact of inflation on consumer sentiment fades out with a decay rate of about 50 percent per year,” meaning it takes a few years for the sting of a high inflationary period to substantially dissipate.
“The impact of inflation this year is half as big as the impact last year, which is half as big as the impact in the year beforehand, so it has a half-life of basically one year,” Mahoney said. “But it takes two to three years for most of the impact of inflation to no longer show up in an analysis which connects inflation to consumer sentiment.”
That lingering effect can dramatically alter views on the economy because, to put it bluntly, consumers really hate high inflation. Research by Stefanie Stantcheva, an economics professor at Harvard University, found that high inflation triggered feelings of anger, fear and injustice. Respondents expressed a widespread belief that their wages were not keeping pace with inflation, resulting in decreased buying power for their households.
Respondents do report receiving wage increases as the inflation rate rose, but people tend to associate those raises with their own job performance or career progression, rather than the higher cost of living, so they often feel like inflation is robbing them of their hard-won earnings. Interestingly, people also tend to believe that the salaries of higher-income individuals are better able to keep up with inflation, amplifying feelings of unfairness.
“As a result, when you ask people about the emotions that are triggered when they see prices rise, it’s a lot of stress, fear, anger,” Stantcheva said. “[That anger] tends to be directed at businesses [and] quite a lot at the government.”
The way forward?
Behind Americans’ doubts about the health of the economy are statistics that go beyond jobs and inflation rates. Understanding those metrics could be key to moving beyond some of the partisan perspectives.
Despite the overall economic improvement, persistently high interest rates have increased the cost of carrying debt, adding to the burden of credit card bills and auto loans. Credit card debt hit a record high of $1.1tn in the final quarter of 2023, although that figure slightly declined in the first quarter of this year. Mortgage rates have come down marginally since last fall, when they reached a 23-year high, but their elevation has added to Americans’ existing concerns that the goal of homeownership has moved permanently out of reach.
Underlying these statistics is the grim reality of how they disproportionately affect lower-income families. Stantcheva’s study found that lower-income Americans report being most adversely affected by high inflation, with some saying they have even delayed buying essentials to cope with rising prices. Her work builds on existing research suggesting that, though high inflation is loathed by all, the burden of the rising cost of living is not equally shared.
Stantcheva’s research also offers some insight into Americans’ thoughts on building a fairer economic system. Like other recent surveys, respondents displayed broad support for a number of policy proposals that might address some of those concerns, including raising taxes on corporations and the wealthiest households. Biden has called for such changes to the tax code, although he has struggled to get them approved by Congress, and he has incorporated his support for tax reform into his campaign messaging.
The messaging could help Biden bridge the divide between his story of economic success and the reality that many Americans are not yet feeling the benefit of the recovery.
“We don’t know each person’s situation, and the statistics just don’t capture this very well,” Stantcheva said. “So I think these feelings should not be dismissed at all. They should be taken quite seriously.”
