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.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
