Americans are feeling opportunity slipping away. After a summer of rising gas and food prices, many feel economic conditions are tough and likely to become worse as the war in Ukraine continues to tighten supply chains and a strong job market starts showing signs of deceleration—creating an environment that is taking a toll on the budgets of those with lower incomes.
A growing pessimism is one of the key findings of the fourth, semi-annual edition of McKinsey’s American Opportunity Survey (AOS), which explores in depth Americans’ perceptions of the current and future state of the US economy—and their place within it. McKinsey worked alongside the market research and opinion-polling firm Ipsos to query 2,010 Americans in fall 2022. The data allowed for a better understanding of how outcomes and perceptions are affected by people’s access to resources, as well as by factors such as gender, age, income, education, ethnicity, urbanicity, and immigration. The breadth and depth of our sample gave timely insights across demographic categories and geographic cuts (see sidebar, “About the survey”).
This article, part of a series, presents the survey’s findings on access to economic opportunity, the steady rise in prices, and the hard budget choices households are facing.
Access to economic opportunity
Americans were slightly pessimistic last spring. A summer of stifling economic conditions has tipped the scales broadly to pessimism. Across every demographic group and metric, Americans have moved toward a negative view. McKinsey’s scores of US economic outlook—scaled from 0 to 200, from low perception of economic opportunity to high perception of economic opportunity, with 100 being neutral—showed a 14-point drop from 99 to 85 in overall economic sentiment compared with a survey of six months ago and an 18-point drop from a survey of a year ago (Exhibit 1).
Unlike previous surveys, the lack of optimism cut across all income levels, genders, and ages, with the sharpest declines among those aged 25 to 34 years old—a group we would expect to be optimistic given they are at the start of their careers and in a relatively job-rich economy.
There are a range of potential drivers that could explain this declining optimism. Those 25 to 34 years old may have historically been saving for and looking to buy a first home. Today, that group is seeing interest rates rise to levels not seen in more than a decade. As for older Americans, many of them may be on fixed incomes—facing rising prices for everyday expenses. Even the wealthy, who may have endured shifting economic tides early in the cycle, may be seeing their financial buffer—a stock portfolio or retirement account—shrink.
Persistent inflation weighs on Americans’ near- and long-term outlook
In one significant way, Americans have reason to be optimistic. The US unemployment rate is almost unchanged: 3.7 percent, compared to 3.6 percent in April when we last conducted the survey. And three-month moving wage growth remains strong: 6.4 percent in October, compared to 6 percent six months ago.
Inflation, however, remains stubbornly high: 7.7 percent year over year in October, compared to 8.3 percent in April. Thus, in real terms, the average American household income today buys less than it could six months ago.
In a context in which price gains outstrip wage growth, more respondents than last year believe America is doing a poor job of providing opportunities for all people (Exhibit 2). And they expect that the trend will continue for themselves and the country in a year and five years from now.
Even cohorts who are relatively economically well-off were pessimistic. Adults aged 25 to 34 suffered the highest drop, underscoring the challenges facing those entering their prime earning years. Higher-income Americans (more than $100,000 annually) experienced the highest drop of 24 points in overall economic sentiment compared with that of six months ago. Although the survey did not ask directly, high-income Americans may have been initially insulated from high inflation (as seen in the spring 2022 run of AOS), with financial tools to alleviate the effects, but the sustained rise in prices and perhaps other factors ended up diminishing their optimism.
Spending more and cutting back—yes, both are true
We asked Americans about their spending habits, and they reported what seemed to be two approaches: some are spending more, and others are cutting back, with variation across categories of expenditure (Exhibit 3). Americans have notably increased spending on essentials such as groceries, utilities, transportation, housing, and healthcare. At the same time, many others are cutting back in many of the same categories. What determines the approach? Income—those with lower incomes have slashed discretionary spending and, in some cases, essentials.
While 19 percent of American households are spending less on groceries, for those making less than $50,000 annually, 23 percent say they have cut their grocery budget. By contrast, just 12 percent of those making more than $100,000 annually have cut back.
With cash buffers from the stimulus checks running low among low-income households, Americans are increasingly resorting to drawing down savings and running up credit card debt. Twenty-four percent of respondents saw a decrease in their debt payments or savings, a 4 percent increase in the past six months. The rising interest rate environment and increased reliance on debt financing may increase financial difficulties for American households in 2023.
Ultimately, the prolonged squeeze on budgets has worn down even the most optimistic Americans. Higher interest rates and prices have combined with lower values and returns on investments. There may still be opportunity. But for many, it feels further away than it did just a few months ago.
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Kashmir is bleeding. So is its economy
On January 1, 2023, as the world celebrated the start of a new year, several families were mourning in the Rajouri district of Indian-administered Jammu and Kashmir. Armed men stormed a village and killed four civilians, injuring six others. Two more civilians were killed the following day.
Just a few weeks earlier, on December 13, India’s Minister of State for Home Affairs Nityanand Rai had presented investment data for Jammu and Kashmir. The numbers spoke for themselves: investments have fallen by 55 percent over the past four years.
Together, the killings and the declining investments contradict two central arguments that have been at the heart of the Indian government’s rationale for the 2019 abrogation of the semi-autonomous status that the region previously enjoyed: that the move would help improve security and spur economic development.
In the past, federal governments in New Delhi have often blamed Jammu and Kashmir’s woes on local governments in power in the region. That’s no longer an excuse that works.
When the Hindu nationalist government of Prime Minister Narendra Modi eliminated Article 370 of the Indian constitution — which gave Kashmir “special status” — it also carved out the territory of Ladakh from the region. Kashmir’s statehood was withdrawn, and it was made a union territory, directly controlled by New Delhi.
Jammu and Kashmir doesn’t even have the disempowered legislature that other union territories have — the region hasn’t had elections in seven years. Yet it should now increasingly be clear, if it wasn’t previously, that sidelining democratic processes and principles, and steamrolling constitutional provisions, aren’t working in improving the region’s security or economic allure.
Follow the money
The abrogation of Article 370 allowed non-residents to buy and own land in Jammu and Kashmir for the first time. Critics of the region’s previous special status frequently cited restrictions on land ownership as a major reason why private sector industries were reluctant to set up businesses there.
However, data published by the Indian government’s Ministry of Home Affairs — and made public by Rai — calls a bluff on those claims. Total investment in 2021-22 in Jammu and Kashmir stood at $46m, down from $50.5m the previous year, and dramatically less than the $102.8m spent in 2017-18.
While the COVID-19 pandemic no doubt affected Kashmir’s economy, the statistics suggest that wasn’t the biggest factor in investments drying up. After all, the steepest fall in investments came the year that the Indian government ended Kashmir’s semi-autonomous status, before the pandemic, halving from $72.3m in 2018-19 to $36.3m in 2019-20.
Track the bullets
Things aren’t much better on the security front. Although political protests have subsided because most pro-independence leaders have been imprisoned, armed groups appear to have changed their tactics.
Attacks on civilians have increased in the last few years and are increasingly being directed at non-resident Hindus and the minority Kashmiri Pandit community. A S Dulat, the former chief of the Research and Analysis Wing, India’s external intelligence agency, recently highlighted the sophistication of these attacks. The targeted killings, he said, demonstrated that the armed groups have a strong intelligence network and possibly have members within the government.
At least 18 Kashmiri Pandits and non-resident Hindus have been killed in Kashmir since the abrogation of Article 370.
As with the economy, the Indian government’s own data does not support claims that armed groups have been contained. The number of attacks by such groups was 229 in 2021, not significantly different from many previous years: There were 279 incidents in 2017, 322 in 2016, 208 in 2015, 222 in 2014 and 170 in 2013, the year before Modi came to power.
What’s really at play
The Indian government had claimed that Article 370 restricted people’s participation in the political process and led to a few families dominating the politics of the region. However, since 2019, Modi’s Bharatiya Janata Party has taken steps to further disempower local Kashmiris.
First, constituency boundaries for the region’s legislature were redrawn in a way that gives Hindu-majority Jammu a greater say in elections than its population, relative to Muslim-majority Kashmir’s, merits. In effect, that strengthens the chances of the BJP coming to power in Jammu and Kashmir.
Then a revision of the voter list was carried out, giving voting rights to outsiders. Jammu and Kashmir is home to hundreds of thousands of migrant workers and army personnel — if allowed to vote, their electoral influence is going to be significant.
Some Kashmiri leaders have invoked the region’s 1987 elections which were allegedly rigged and were considered a tipping point when the armed separatist movement in Kashmir took off.
Meanwhile, armed groups may continue to adopt attacks on non-local civilians as the mainstay of their strategy to signal their opposition to demographic changes attempted by New Delhi.
While Kashmiris and non-locals alike suffer, there is no reason to expect that Modi and his government will change their policy towards the region. The BJP’s hardline approach towards Kashmir helps it bolster its image in the rest of India as a party that is tough on “terrorism” and “separatism”.
The truth, of course, is more complicated. The BJP’s policies have led to increased insecurity for people living in the region — whether they’re Hindu or Muslim. And there has been no economic payoff, either.
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