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You are here: Home / Podcast / 472: Is the Economy as Bad as People Think?

472: Is the Economy as Bad as People Think?

March 27, 2024 by David Stein · Updated April 2, 2024

Why most households are in better financial shape than prior to the pandemic, but remain frustrated at their lack of economic progress.

Cracked wall with the caption "Economic Shocks"

Topics covered include:

  • How consumer sentiment surveys are designed and their current findings.
  • Reasons behind consumer frustration with increasing prices amidst declining inflation rates.
  • The magnitude of the inflation shock and its underlying causes.
  • The concept of reference prices and their significant role in shaping consumer sentiment.
  • Factors contributing to the high levels of economic uncertainty among households.
  • Key elements required for enhancing consumer confidence in their economic future.
  • The political repercussions stemming from widespread economic dissatisfaction.

Show Notes

Surveys of Consumers—University of Michigan

Consumer sentiment climbs amid split views on business outlook—University of Michigan

The Purchasing Power of American Households—U.S. Department of the Treasury

Unemployment Rate—St. Louis Fed

We Still Don’t Believe How Much Things Cost by Rachel Wolfe and Rachel Louise Ensign—The Wall Street Journal

It’s Been 30 Years Since Food Ate Up This Much of Your Income by Jesse Newman and Heather Haddon—The Wall Street Journal

Consumers are increasingly pushing back against price increases — and winning by Christopher Rugaber—Yahoo! Finance

Kraft Heinz ups ad spend, changes leadership by Christopher Lombardo—Strategy

Many Americans Believe the Economy Is Rigged by Katherine J. Cramer and Johnathon D. Cohen—The New York Times

Covid-19 Coronavirus Pandemic—Worldometer

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Transcript

Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 472. It’s titled “Is the Economy as Bad as People Think?”

Current State of the U.S. Economy

In the US, the unemployment rate has been under 4% for two years. That’s the best stretch of unemployment since the 1950s. The latest inflation numbers, the US Consumer Price Index, it increased only 3.2% for the year ending February 2024. That’s down substantially from 2023 and 2022. Real wages for US workers are higher now than they were prior to the pandemic. 

In other words, US workers, after adjusting for inflation, are making more money than they were four years ago. Yet surveys of US consumer sentiment show not only did consumer sentiment hit its lowest level ever in mid-2022, but the level of consumer sentiment is still well below what it was prior to the pandemic. 

Why is there this disconnect between economic progress and how we feel about the economy? That’s what we’ll explore in today’s episode. But first, we’re going to recognize that yeah, the economy is doing better in aggregate, but it’s always doing worse for somebody. Individuals who have lost their jobs, individuals who can’t afford to pay rent. I was speaking with a friend yesterday that lives in Phoenix and has had to downgrade their living situation, because rents have shot up so high there and in many other places around the country.

How Consumer Sentiment Is Measured

First, let’s take a look at how consumer sentiment is measured. One of the longest-running surveys of consumers is the University of Michigan Survey. It started in 1946, and they do an index of consumer sentiment. It’s derived from five core questions. They asked consumers about their personal financial situation today, compared to a year prior. They asked consumers about their expectation for their personal financial situation a year from now. They asked about overall economic conditions and to rate the current economy. They asked consumers about their short-term economic outlook, and for their long-term economic outlook for the next five years.

500 consumers are sampled each month. The way that the surveys work is the base index level is 100. That’s back in 1966. And if we look at the latest, these are preliminary results from March 2024. They were just released this morning, and it shows that the index of consumer sentiment is at 76.5. So down slightly from February, but still 25% below what it was prior to the pandemic.

Now, there’s been a big increase in consumer sentiment. It’s up 29% From what it was back in November 2023, and that’s the biggest two-month increase since 1991. So there has been some improvement, but consumers still are cautious and dispirited regarding the US economy.

That’s for the overall index of consumer sentiment. 

If we look at their current financial situation versus a year ago, there’s a 15 percentage points gap in terms of those that feel worse, worse about their situation now versus a year ago, compared to those that feel that they’re better off. More feel worse than feel better off. And then if they’re asked “What is causing that economic angst? Why consumers feel worse off? Why do they have a negative outlook on US economy?”, it comes down to higher prices. Over 40% give higher prices, inflation, price increases as the reason they feel worse about their personal finances.

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Filed Under: Podcast Tagged With: economic narratives, economic shocks, economy, inflation

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