Download the PDF: The gap between macroeconomic analysis and citizens’ individual perceptions of the U.S . economy
DISCLAIMER: The opinions expressed in this note are those of the author alone and do not represent those of BSI or its employer.
Summary:
- Following the presidential election, this article revisits the significant gap between the macroeconomic health of the US economy and American households’ perception of that same economy.
- It shows that the issue of inflation is key to understanding this gap.
- It is interesting to note that despite resilient domestic consumption, a rise in real per capita income, and moderate price growth over the past year, households’ anxiety about inflation has not subsided.
- Explanations based on behavioral economics and the differentiated impact of inflation by income category are presented to make sense of the continued high level of anxiety about prices.
- In conclusion, some avenues for reflection are proposed on the potential implications of the elements of this note in terms of fiscal and monetary policy.
In October 2023, the Financial Times asked the question explicitly: « Why is the US economy so resilient? » With a year to go before the presidential election, all indicators seemed to be green. With real GDP growth of +2.9% in 2023 and an unemployment rate close to 4%, the United States was shining brightly compared to Europe, which was weighed down by sluggish domestic demand and difficulties in reviving its industrial machine, and China, which was still reeling from the real estate crisis. The positive surprise in the US continued in 2024[2], to the point that the International Monetary Fund (IMF) revised its US growth forecast for that year upwards, based on « improved consumption and non-residential investment« [3].
And yet, all this strong macroeconomic performance cannot hide a troubling paradox. According to surveys conducted by the Pew Research Center in early September 2024, two months before the November 5 presidential election, only 25% of American citizens had a positive opinion of the state of their economy (see Chart 1). These figures reveal a division along political lines, with 90% of Republican respondents saying they were dissatisfied with current economic conditions. But even among Democrats, the majority of those surveyed (59%) also had a generally negative opinion of the situation. The same Pew Research Center survey also indicated that 81% of respondents considered the economy to be a « very important » issue in their choice of vote for the November presidential election.
Figure 1: Survey of American adults’ satisfaction with the country’s economic conditions
Sources: Pew Research Center
To understand this wide gap between the strength of US macroeconomic indicators and households’ negative perceptions of the economy, we need to revisit the recent inflationary shock that has had a profound impact on the daily lives of American households.
- The major impact of inflation on individual perceptions of economic conditions
Looking more closely at the economic concerns of Americans surveyed by the Pew Research Center, we see a degree of stability since 2023 in the hierarchy of economic issues considered most worrying. Table 1 below shows that, in September 2024, inflation in food and consumer goods remained the main source of concern for survey respondents, closely followed by the cost of housing, with the proportion of respondents who were very concerned increasing by 8 percentage points between April 2023 and September 2024. The issue of the labor market also saw a notable increase of 13 points but remains, overall, a secondary concern compared to the first two issues mentioned above.
Table 1: Economic issues considered most concerning by American citizens
% of respondents saying they are very concerned about the issue discussed
| Issue | April 2023 | January 2024 | September 2024 |
| Prices of food and other consumer goods | 72 | 72 | 74 |
| Housing costs | 61 | 64 | 69 |
| Difficulty finding a job | 27 | 31 | 40 |
| Stock market dynamics | 24 | 18 | 24 |
Source: Pew Research Center
The growing concerns of survey respondents about the cost of housing may be linked, in particular, to rising interest rates[4]. On this subject, a note from the Federal Housing Finance Agency (FHFA) shows that the recent increase in mortgage rates has prompted many homeowners—who are repaying fixed-rate loans taken out before the pandemic—not to sell their properties in order to avoid taking out a new loan with a much higher rate than their current one[5]. This phenomenon tends to further reduce the stock of available properties and drive up prices, further exacerbating the difficulties faced by households looking for housing. We can therefore assume that there is a certain consistency between macroeconomic dynamics and growing household concerns.
Figure 2: Disposable income, consumer spending, and savings rates in the United States
Adjusted for inflation, Q1 2019 = 100
Source: US Bureau of Economic Analysis (BEA), author’s calculations
However, on the major issue of inflation, the gap between household perceptions and macroeconomic analysis appears considerable and more surprising. Respondents to the Pew Research Center survey expressed almost constant concern about this issue between April 2023 and September 2024. But macroeconomists could argue that inflation slowed considerably over the same period. Between April 2023 and September 2024, US inflation fell from +4.9% year-on-year to +2.4%. This represents a more than twofold decrease in the price index growth rate. It is clear that a slowdown in price growth does not mean that prices are falling, and that the previous large increases continue to affect the daily lives of American households. However, it is necessary to look at the income side of the equation to get the full picture. Chart 2 above shows that real disposable income[6] per capita for US households increased by +2.8% between the second quarter of 2023 and the third quarter of 2024. How, then, can we make sense of the lack of improvement in households’ perceptions of inflation, given that the rate of price growth has halved and real disposable income is rising?
This note offers two types of explanation for the discrepancy between changes in households’ perceptions of economic conditions and the conclusions drawn from the analysis of macroeconomic data: (i) the role of cognitive biases affecting individuals’ perceptions and (ii) the importance of analyzing prices and incomes beyond their average or aggregate dynamics[7].
- A differentiated perception of gains and losses
First, we cannot rule out the possibility that individuals are, to some extent, victims of cognitive biases that influence their views of the economic situation. In the more specific context of the perception of inflation that we are discussing here, we can refer to one of the major theories of behavioral economics developed by Kahneman and Tversky in the late 1980s: prospect theory[8]. The work of these two economists shows, in particular, that individuals do not have the same sensitivity to gains and losses, with the psychological cost of a monetary loss tending to be greater than the psychological benefit generated by a gain of the same magnitude.
Figure 2 above provides a fairly intuitive illustration of this phenomenon of loss aversion. The dotted blue curve represents real disposable household income per capita if it had followed the growth trend observed in the pre-pandemic period from 2015 to 2019. In the third quarter of 2024, real disposable income per capita was very close to its pre-pandemic trend, but before that, it went through two distinct phases:
- A first phase of growth in real disposable income per capita above the pre-pandemic trend between 2020 and 2021, made possible in particular by the federal aid packages agreed by the Trump and Biden administrations to address the economic impact of the Covid-19 pandemic. These sharp increases in real disposable income led to a substantial rise in household savings, particularly in 2020, when consumption was limited by health restrictions.
- A phase of decline followed by a gradual recovery in real disposable income per capita below its pre-pandemic trend between 2022 and 2024. This second phase corresponds to the onset of the inflationary shock that eroded the purchasing power of US consumers. It is interesting to note that real per capita consumer spending was only marginally affected by the inflationary shock. This seems to be explained by a smoothing effect of consumption through savings, with households using part of their savings accumulated during the pandemic to maintain their consumption levels in volume terms despite a decline in their real disposable income from 2022 onwards. The stabilization of the savings rate at a level below that of 2019, starting in 2023, may also indicate that households are finding it increasingly difficult to maintain their usual level of consumption, forcing them to draw on their savings more than in the past.
Following Kahneman and Tversky’s theory, we can assume that the second phase of households’ loss of purchasing power had a disproportionate impact on their perception of the economic situation, even though the previous two years had seen substantial income gains, well above the pre-pandemic trend. The fact that US households had, in the third quarter of 2024, real disposable income per capita almost as high as in a theoretical counterfactual scenario without a pandemic and inflation crisis does not change anything. According to Kahneman and Tversky’s hypothesis, the psychological cost of the one-off loss of real income linked to inflation remains firmly anchored in people’s minds and keeps their perceptions in negative territory.
- Going beyond the average
Macroeconomic price and income tracking is generally based on average analysis. Total income is divided by the population to obtain « per capita income, » while the consumer price index is calculated based on a study of the average consumption basket for all households. Although often necessary for the sake of simplicity, analysis based on averages can mask dynamics that sometimes vary greatly depending on the different criteria used to categorize individuals: income, level of education, age, geographical location, etc.
Figure 3: Consumer price growth in the United States and its components[9]
Year-on-year change and contribution in percentage points
Source: Federal Reserve Bank of San Francisco, author’s calculations
When considering the impact of inflationary shocks, it is important to remember that not all households consume in the same way. These different consumption baskets are therefore not equally affected by the same inflationary shock. For example, essential goods and services such as food, energy, and housing account for a very large share of low-income households’ spending (up to 77%), while they represent a much smaller share of high-income households’ spending (31%)[10]. However, these so-called « necessary » or constrained expenditure items have been major contributors to inflation in the United States, as shown in Chart 3 above.
While nearly half of US inflation at its peak in mid-2022 can be explained by the contribution of essential goods and services, it is logical to conclude that this phenomenon of rising prices was felt more strongly by the less affluent segments of the population, who saw their purchasing power decline more sharply. Similarly, it is also possible to assume that households living in suburban or rural areas, where daily use of a car is essential, may have felt the impact of inflation at the gas pump more strongly than those living in large urban areas.
On the income side, the trend in nominal wages shows a relatively similar evolution for all income quartiles, with an advantage for the lowest 50% of wages (see Chart 4 below). Wage compensation therefore does not seem to be able to explain, on its own, the significant differences in how households perceive inflation. The significant job creation recorded in the post-COVID period may also have helped to support household purchasing power, although this seems to be particularly concentrated among immigrant populations who have recently entered the United States.
Figure 4: Median wage growth by income quartile in the United States
%
%, 12-month moving average
Source: Atlanta Federal Reserve’s « Wage Growth Tracker »
Finally, earned income is not the only source of income for households. Income from property and movable assets can also play a significant role in households’ ability to cope with inflationary shocks. However, the unequal distribution of wealth within American society tends to favor certain categories of households over others when interest rates rise and stock markets soar, as has been the case over the past two years. A Gallup poll published in May 2024 showed, for example, that 87% of Americans with an annual income of more than $100,000 owned stocks, compared with only 25% of those with an annual income of $40,000 or less[13].
These inequalities in terms of exposure to inflation and income growth tie in with a recent Federal Reserve article showing that the resilience of real per capita consumption, as seen in Chart 2, actually masks significant disparities. Households with an annual income of less than $60,000 have seen their real retail spending stagnate since 2021, while it has increased significantly over the same period for middle- and high-income households (Chart 5). These results clearly indicate that behind the « average » macroeconomic measure lie very different perceptions and experiences of economic reality among individuals.
Chart 5: Retail spending, adjusted for inflation, by income group in the United States
Growth compared to the January 2018 benchmark
Source: Sinem Hacıoğlu Hoke, Leo Feler, and Jack Chylak, « A Better Way of Understanding the US Consumer: Decomposing Retail Spending by Household Income, » Federal Reserve, October 2024
To conclude, a final section offers some thoughts on the implications of the points raised in this note in terms of fiscal and monetary policy in the United States.
Potential implications for fiscal and financial policy
In terms of fiscal policy:
- The uneven impact of the inflation shock depending on the consumption basket used shows that an effective fiscal policy to combat the loss of household purchasing power must take into account a detailed analysis of the goods and services under the most pressure. This would provide the best possible support to households most affected by price rises, while avoiding any waste of public money associated with indiscriminate fiscal policies. In France, this idea has been promoted in particular by the Court of Auditors, which has highlighted the lack of discriminating criteria regulating access to the « energy check »[14], a measure that was used extensively during the energy crisis following the outbreak of war in Ukraine.
- The United States now finds itself in a new political context that is a source of additional inflation (higher customs tariffs, potential reduction in the working population with the supposed deportation of millions of illegal immigrants). While the government’s budgetary margins are likely to become tighter at the same time, the impact of a further rise in prices on inflation could this time weigh more heavily on household consumption in the absence of a new major budgetary effort similar to that of 2020-2021.
- Finally, the policy of defending consumer purchasing power is not without contradiction with other objectives pursued by fiscal policy. Donald Trump’s pro-fracking slogan « drill, baby, drill, » aimed, among other things, at reducing American households’ fuel bills, risks, for example, coming into sharp conflict with the incentives for greening the economy initiated by the Inflation Reduction Act under the Biden administration.
On the monetary front:
- The gap between the macroeconomic picture and households’ perceptions of inflation can lead to discrepancies between consumer inflation expectations and those calculated from market variables and economists’ forecasts. To illustrate this point, the average one-year inflation expectations given by the University of Michigan’s US consumer survey for the first ten months of 2024 were 2.9%, compared with 2.5% for the expectations obtained through the Cleveland Federal Reserve’s model, based on surveys of professional forecasters and inflation swaps traded on the markets. Too large a gap between these different inflation expectations could make it more difficult for the Federal Reserve to steer monetary policy in the future.
- In terms of housing costs, the note mentioned that the Federal Reserve’s rate hikes, designed to combat inflation, may paradoxically increase price pressures in the real estate market—a major concern for many households. This apparent contradiction is likely to persist in the absence of a more substantial supply of new properties, particularly in geographical areas where the housing shortage is most acute.
[1] By way of comparison, over the same period, the eurozone achieved annual growth of only 0.4% in real terms.
[2] With real growth of +2.6% over the first three quarters, a labor market that remains dynamic (despite a gradual slowdown in job creation), sustained domestic demand, and a stock market at historic highs.
[3] IMF, October 2024 World Economic Outlook, Chapter 1, p.9.
[4] At the beginning of November 2024, a 30-year mortgage had an average interest rate of 6.8%, compared with 3% at the end of 2021.
[5] Ross M. Batzer, Jonah R. Coste, William M. Doerner, and Michael J. Seiler, « The Lock-In Effect of Rising Mortgage Rates, » Federal Housing Finance Agency, Working Paper, March 2024.
[6] Real here means adjusted for inflation.
[7] These two explanatory channels are discussed in a recent article by Jean-Luc Tavernier, « Peut-on mesurer le ressenti des phénomènes économiques et sociaux ? » (Can we measure perceptions of economic and social phenomena?), INSEE, October 2024.
[8] Daniel Kahneman and Amos Tversky, « Prospect Theory: An Analysis of Decision under Risk, » Econometrica, vol. 47, no. 2, March 1979, pp. 263-291.
Readers may also consult a more detailed study by Arno Fontaine on the issue of behavioral biases and their economic and financial impacts on the BSI Economics website: Self-fulfilling prophecies, biases, and economics: individual decisions and their impacts on economic activity (Note) – BSI Economics, the economic think tank.
[9] Inflation is measured here by changes in the price of US household consumer spending, an alternative to the consumer price index closely monitored by monetary authorities.
[10] Speech by Lael Brainard, Member of the Board of Governors of the Federal Reserve, at the Spring 2022 Research Conference, Opportunity and Inclusive Growth Institute, Minneapolis, April 5, 2022.
[11] Wendy Edelberg and Tara Watson, « New immigration estimates help make sense of the pace of employment, » Hamilton Project, Brookings, March 2024.
[12] Readers may refer to the recent study by the Federal Reserve Bank of St. Louis on this topic: Kent and Ricketts, « The State of U.S. Wealth Inequality, » October 2024.
[13] Jeffrey M. Jones, « Stocks Up, Gold Down in Americans’ Best Investment Ratings, » Gallup, May 2024.
[14] Court of Auditors, « The Energy Check, » Communication to the Finance, General Economy and Budgetary Control Committee of the National Assembly, February 2022.
