Why so sad?
Over the past few years, consumer sentiment has increasingly run far below the level predicted by models based on economic data. The Economist illustrates the issue with a graph:
The Economist attributes the gloomy outlook to the lingering effects of Covid. I suspect the actual explanation is growing political polarization. Consider the growing partisan gap in how voters evaluate the economy:
Back in the 1990s, there wasn’t much partisan difference in how voters evaluated the condition of the economy. This was before the public had come to view people with different points of view as the enemy. I suspect that the responses to polls were more honest back then. After 9/11, opinion became more polarized. After Trump was elected, polarization increased even further. Today, voters in the two major parties live in completely separate worlds, consuming media that is tailored to fit their prejudices. Thus it’s not surprising that they have radically divergent views of the world.
Voters seem to rate the economy much more highly when their preferred candidate is in power, perhaps partly due to the mistaken assumption that presidents somehow control inflation and the business cycle. (A myth that is encouraged by our media.)
Until 2021, the biases of the two parties roughly offset, leaving the overall rating roughly equal to the rating one would expect based solely on the economic data. This changed after Joe Biden became president. Unlike with President Obama (who inherited a weak economy), Democratic voters are only lukewarm on the current president.
In contrast, Republican voters have an extremely negative view of President Biden. With only lukewarm sentiment from Democrats, there is nothing to offset the extremely low economic rating of Republicans. This leaves the overall rating for the economy far below the level you’d expect with rising real wages, 3.8% unemployment, and 3.7% inflation. At one point in 2022, consumer sentiment fell below the lowest reading of the early 1980s, when the economy was in far worse shape.
I don’t believe these consumer sentiment figures represent the actual views of the public. Consumer spending is still very strong, an indication that people feel pretty good about the economy. Actions speak louder than words. I suspect the low reported sentiment is mostly a reflection of GOP voters expressing anger at the current political situation.
My own view is that recent economic policy (since 2017) is quite bad, but the negative effects will show up in future years, at a point where we will need to confront the effects of an out of control federal budget. If people think the current economy is bad, wait until they see what’s coming down the road in a few years!
PS. Note to commenters: If you think the economic model is wrong, you need to explain why it fit the data for the 40-year period from 1980 to 2020.