What was the worst moment for the American economy in the past half century? You might think it was the last wheezing months of the 1970s, when oil prices more than doubled, inflation reached double digits, and the U.S. sank into its second recession of the decade. Or the 2008 financial collapse and Great Recession. Or perhaps it was when COVID hit and millions of people abruptly lost their job. All good guesses—and all wrong, if surveys of the American public are to be believed. According to the University of Michigan Surveys of Consumers, the most widely cited measure of consumer sentiment, that moment was actually June 2022.
Inflation hit 9 percent that month, and no one knew if it would go higher still. A recession seemed imminent. Objectively, it’s hard to claim that the economy was in worse shape that month than it had been at those other cataclysmic times. But substantial pessimism was nonetheless explicable.
Over the next 18 months, however, the economy improved rapidly, and in nearly every way: Inflation plummeted to near its pre-pandemic level, unemployment reached historic lows, GDP boomed, and wages rose. The turnaround, by most standard economic measures, was unprecedented. Yet the American people continued to give the economy the kind of approval ratings traditionally reserved for used-car salesmen. Last June, the White House launched a campaign to celebrate “Bidenomics”—the administration’s strong job-creation record and big investments in manufacturing and clean energy. The effort flopped so badly that, within months, Democrats were begging the president to abandon it altogether.
Some kind of irreconcilable difference seemed to have opened up between public opinion and traditional markers of economic health, as many op-eds and news reports noted. “The Economy Is Great. Why Are Americans in Such a Rotten Mood?” The Wall Street Journal asked in early November. “What’s Causing ‘Bad Vibes’ in the Economy?” The New York Times wondered a few weeks later. Terms like “vibecession” and “the great disconnect” were coined and spread.
More recently, consumer sentiment has improved. After falling for months, it suddenly rebounded in December and January, posting its largest two-month gain in more than 30 years—even though the economy itself barely changed at all. Yet as of this writing, sentiment remains low by historical standards—nothing like the sunny outlook that prevailed before the pandemic.
What’s going on? The question involves the psychology of money—and of politics. Its answer will shape the outcome of the presidential election
in November.
The toll of inflation on the American psyche is undoubtedly part of the story. That people hate high inflation is not a novel observation: The Federal Reserve has long been obsessed with preventing another ’70s-style inflationary spiral; its patron saint is Paul Volcker, the former Fed chair who famously broke that spiral by jacking up interest rates, which plunged the economy into a recession. But although experts and political leaders know that inflation matters, the way they understand the phenomenon is very different from how ordinary people experience it—and that alone may explain why sentiment stayed low for so long, and has only now begun to rise.
When economists talk about inflation, they are often referring to an index of prices meant to represent the goods and services a typical household buys in a year. Each item in the index is weighted by how much is spent on it annually. So, for instance, because the average household spends about a third of its income on housing, the price of housing (an amalgam of rents and home prices) determines a third of the inflation rate. But the goods that people spend the most money on tend to be quite different from those that they pay the most attention to. Consumers are reminded of the price of food
every time they visit a supermarket or restaurant, and the price of gas is plastered in giant numbers on every street corner. Also, the purchase of these items can’t be postponed. Things like a new couch or flatscreen TV, in contrast, are purchased so rarely that many people don’t even remember how much they paid for one, let alone how much they cost today.
The irony is that consumers spend a lot more, on average, on expensive, big-ticket items than they do on groceries or takeout, which means the prices we pay the most attention to don’t contribute very much to overall inflation numbers. (Less than a tenth of the average consumer’s budget is spent at the supermarket.) Some measures of inflation—“core” and “supercore” inflation among them—exclude food and energy prices altogether. That is reasonable if you’re a Fed official focused on how to set interest rates, because energy and food prices are often extremely sensitive to temporary fluctuations (caused by, say, a drought that hurts grain harvests or an OPEC oil-supply cut). But in practice, these measures overlook the prices that matter most to consumers.
This dynamic alone goes a long way toward explaining the gap between “the economy” and Americans’ perception of it. Even as core inflation fell below 3 percent over the course of 2023, food prices increased by about 6 percent, twice as fast as they had grown over the previous 20 years. “I think that explains a huge part of the disconnect,” Paul Donovan, the chief economist at UBS Global Wealth Management, told me. “You won’t convince any consumer that inflation is under control when food prices are rising that fast.”
Consumers say as much when you ask them. In a recent poll commissioned by The Atlantic, respondents were asked what factors they consider when deciding how the national economy is doing. The price of groceries led the list, and 60 percent of respondents placed it among their top three—more, even, than the share that chose “inflation.” This isn’t exactly a new development. In 2002, Donovan told me, Italian consumers were convinced that prices were soaring by nearly 20 percent even though actual inflation was a stable 2 percent. It turned out that people were basing their estimates on the cost of a cup of espresso, which had abruptly risen as coffee makers rounded their prices up after the introduction of the euro.
What’s more, most people don’t care about the inflation rate so much as they care about prices themselves. If inflation runs at 10 percent for a year, and then suddenly shrinks to 2 percent, the damage of the past year has not been undone. Prices are still dramatically higher than they were. Overall, prices are nearly 20 percent higher now than they were before the pandemic (grocery prices are 25 percent higher). When asked in a survey last fall what improvement in the economy they would most like to see, 64 percent of respondents said “lower prices on goods, services, and gas.”
What about wages? Even adjusted for inflation, they have been rising since June 2022, and recently surpassed their pre-pandemic levels, meaning that the typical American’s paycheck goes further than it did prior to the inflation spike. But wages haven’t increased faster than food prices. And most people think about wage and price increases very differently. A raise tends to feel like something we’ve earned, Betsey Stevenson, an economist at the University of Michigan, told me. Then we go to the grocery store, and “it feels like those just rewards are being unfairly taken away.”
If inflation is in fact the main reason the American people have been so down on the economy—and its future—then the story is likely to have a happy ending, and soon. My great-grandmother loved to reminisce about the days when a can of Coke cost a nickel. She didn’t, however, believe that the country was on the verge of economic calamity because she now had to spend a dollar or more for the same beverage. Just as surely as people despise price increases, we also get used to them in the end. A recent analysis by Ryan Cummings and Neale Mahoney, two Stanford economists and former policy advisers in the Biden administration, found that it takes 18 to 24 months for lower inflation to fully show up in consumer sentiment. “People eventually adjust,” Mahoney told me. “They just don’t adjust at the rate that statistical agencies produce inflation data.”
Mahoney and Cummings posted their study on December 4, 2023—18 months after inflation peaked in June 2022. As if on cue, consumer sentiment began surging that month. (Perhaps helping matters, food inflation had finally fallen below 3 percent in November 2023.)
There is another story you can tell about consumer sentiment today, however, one that has less to do with what’s happening in grocery stores and more to do with the peculiarities of tribal identity.
It’s well established that partisans on both sides become more negative about the economy when the other party controls the presidency, but this phenomenon is not symmetrical: In a November analysis, Mahoney and Cummings found that when a Democrat occupies the White House, Republicans’ economic outlook declines by more than twice as much as Democrats’ does when the situation is reversed. Consumer-sentiment data from the polling firm Civiqs and the Pew Research Center show that Republicans’ view of the economy has barely budged since hitting an all-time low in the summer of 2022.
Meanwhile, although sentiment among Democrats has recovered to nearly where it stood before inflation began to rise in 2021, it remains well below its level at the end of the Obama administration. It may never return to its previous heights. Over the past decade, the belief that the economy is rigged in favor of the rich and powerful has become central to progressive self-identity. Among Democrats ages 18 to 34, who tend to be more progressive than older Democrats, positive views of capitalism fell from 56 to 40 percent between 2010 and 2019, according to Gallup. Dim views of the broader economic system may be limiting how positively some Democrats feel about the economy, even when one of their own occupies the Oval Office. According to a CNN poll in late January, 63 percent of Democrats ages 45 and older believed that the economy was on the upswing—but only 35 percent of younger Democrats believed the same. To fully embrace the economy’s strength would be to sacrifice part of the modern progressive’s ideological sense of self.
The media may be contributing to economic gloom for people of every political stripe. According to Mahoney, one possible explanation for Republicans’ disproportionate economic negativity when a Democrat is in office is the fact that the news sources many Republicans consume—namely, right-wing media like Fox News—tend to be more brazenly partisan than the sources Democrats consume, which tend to be a balance of mainstream and partisan media. But mainstream media have also gotten more negative about the economy in recent years, regardless of who’s held the presidency. According to a new analysis by the Brookings Institution, from 1988 to 2016, the “sentiment” of economic-news coverage in mainstream newspapers tracked closely with measures such as inflation, employment, and the stock market. Then, during Donald Trump’s presidency, coverage became more negative than the economic fundamentals would have predicted. After Joe Biden took office, the gap widened. Journalists have long focused more on surfacing problems than on highlighting successes—bringing problems to light is an essential part of the job—but the more recent shift could be explained by the same economic pessimism afflicting many young liberals (many newspaper journalists, after all, are liberals themselves). In other words, the media’s negativity could be both a reflection and a source of today’s economic pessimism.
What happens to consumer sentiment in the coming months will depend on how much it is still being dragged down by frustration with higher prices, which will likely dissipate, as opposed to how much it is being limited by a combination of Republican partisanship and Democratic pessimism, which are less likely to change.
Will the place that it finally settles in come November matter to the election? How people say they are feeling about the economy in an election year—alongside more direct measures of economic health, such as GDP growth and disposable income—has in the past been a good predictor of whom voters choose as president; a healthy economy and good sentiment strongly favor the incumbent. Despite all the abnormalities of 2020—a pandemic, national protests, a uniquely polarizing president—economic models that factored in both economic fundamentals and sentiment predicted the result and margin of that year’s presidential election quite accurately (and much more so than polling), according to an analysis by the political scientists John Sides, Chris Tausanovitch, and Lynn Vavreck.
It is of course possible that consumer sentiment is becoming a more performative metric than it used to be—a statement about who you are rather than how you really feel—and perhaps less reliable as a result. Still, the story that voters have in their heads about the economy clearly matters. If that story were influenced solely by the prices at the pump and the grocery store or the number of well-paying jobs, then—absent another crisis—we could expect the mood to be buoyant this fall, significantly helping Biden’s prospects for reelection. But the stories we tell ourselves are shaped by everything from the news we read to the political messages we hear to the identities we adopt. And, for better or worse, those stories have yet to be fully written.
