Despite a strong labor market, Americans have felt pretty downbeat about the state of the economy. A recent economic paper found that this discontent stems from inflation outpacing wage gains. Since the pandemic, the impact of unemployment on Americans’ sentiment fell significantly. Loading Something is loading.
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President Joe Biden touted the strong labor market this week as part of his “Bidenomics” campaign, but it may be a moot point to Americans.
While the jobless rate is at the lowest in more than 50 years, consumer sentiment readings are near levels associated with recession.
As it turns out, the unemployment level now has far less influence over how people feel about the economy compared to years past, and consumers are instead focused on wages and inflation, a new paper by economist Darren Grant found.
Historically, slowdowns in output and higher jobless rates weighed on consumer sentiment. But the last three years broke that pattern, with some commentators trying to explain it by pointing, for example, to how different political affiliations affect views on the economy.
Instead, Grant found that the job market’s recovery in 2021 and 2022 was largely ignored by Americans, as they despaired over inflation. Unemployment has become “decoupled” from perceptions about the economy, and real wages have grown similarly disconnected from the strength of the labor market, he said.
“As low unemployment has ceased to translate into real wage gains, economic pessimism has grown,” Grant said. He noted that in 2021 and 2022, unemployment and GDP growth normalized but real wages fell substantially, dragging down economic perceptions.
To be sure, Americans have always felt badly about rising inflation. But in previous times, strength in the labor market has been able to offset that. Yet, with jobs data now holding a lesser role on perception, Americans feel more reason to be down.
Remember, it wasn’t until this month that pay raises caught up with inflation after two years of lagging. May’s consumer price index report showed a 4.0% annual increase, while average hourly wages were up 4.3% over the same stretch.
Even so, there’s a long way to go before Americans feel confident financially, given recent cuts to food stamp benefits, looming student loan payments, climbing credit card balances, and still-high interest rates.
Inflation also remains top of mind at the Federal Reserve, which is committed to bringing it back down to its 2% target. After 10 consecutive rate hikes, the Fed decided against one at the June meeting, though Chairman Jerome Powell has indicated more rate hikes are likely.
Meanwhile, the job market has so far remained resilient despite the Fed’s aggressive tightening. But according to Grant, low real wage growth alone explains most of the drop in sentiment during 2021 and 2022.
“This decline is not irrational, but a reflection of the inability of wages to keep up with inflation,” he said.