The U.S. economy wasn’t high on the list Americans were thankful for this Thanksgiving, despite the strong labor market and consumer spending that’s helped dodge a recession many economists predicted would happen by now.
Consumer confidence levels are so bad, they continue to signal a recession. Consumer sentiment has fallen for four straight months. And in a recent Gallup poll, 47% rated the economy as “poor” with 33% saying it was “only fair.”
The economy, however, has defied widespread predictions of a recession at the beginning of the year, and posted astonishing 4.9% growth in the third quarter. Inflation has come down precipitously. And the labor market remains strong with the unemployment rate still hovering below 4%.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, finds attitudes about the economy confounding.
“This discrepancy between how business feel, how individuals feel, how consumers feel is hard to reconcile with the numbers,” he said during a panel discussion at the Detroit Economic Club on Nov. 14. “We’re just trying to figure out what that is.”
When his branch of the nation’s central bank surveys people about the economy, a common response is “horrible.” When asked about their personal financial condition, though they often answer, “pretty good.”
“There’s never been a bigger gap,” Goolsbee said.
The Chicago Fed’s surveys were particularly astonishing in the third quarter when the economy posted growth of nearly 5%.
“Nobody we talk to was like, ‘Wow, this feels like a 5% growth economy.’ I mean, 5% is booming and that was not what business described,” Goolsbee said. “They kind of described, ‘wow these interest rates seem really high.'”
The gap between consumer confidence and consumer spending broke down some time after the 2008-2009 financial crisis, Goolsbee said. People say the economy looks terrible, yet they go out and spend. “I don’t know 100% what to make of it,” he said in a recent CNBC interview.
Currently, the answer may rest in elevated interest rates and sticky inflation. Before the pandemic, interest rates had been at historically low levels for more than a decade and inflation held under the Fed’s 2% target. In the recovery, inflation skyrocketed to a peak of 9.1% in June 2022, and the central bank has raised interest rates to a 16-year high in response.
All of this has made life more expensive. And even though inflation has moderated to 3.2% in October, prices are still high and inching higher.
Cassandra Happe, an analyst at personal finance website, WalletHub, says consumers are relying on loans and credit cards to cope with inflation and they’re are getting walloped by higher interest rates on their balances.
News that the economy keeps growing, that jobs remain plentiful and that consumer spending is holding strong, hasn’t brightened moods. Nor have lower gasoline prices and even cheaper turkey prices this year or the news that major economists have all but written off the possibility of a recession in the coming year or so and expect interest rates to start coming down next year.
“Many consumers still remember the economic downturn of the Great Recession of 2008-2009, which may add to their hesitation in trusting that the positive trends will continue,” Happe said.
Treasury Secretary Janet Yellen acknowledged the gap between an improving economy and peoples’ perceptions of it in a CNBC interview on Monday.
“We’re making considerable progress in bringing inflation down,” she said. “But Americans do notice higher prices from what they used to be accustomed to.”
She expects it’s only a matter of time before perceptions change.
“As inflation comes down, prices stop rising, and the labor market remains
strong, Americans will begin to see that we have made meaningful progress,” she said.
