Of all the factors that determine the outcome of modern elections the performance of the economy is probably the most important. As James Carville, Bill Clinton’s campaign adviser, put it in the 1992 presidential election, “It’s the economy, stupid”. Carville’s relentless focus during the campaign on the lingering effects of the 1991 recession helped Clinton to victory, ending 12 years of Republican control of the White House.
If economic performance wins elections the Democrats should be heading for another four years of government in November’s presidential election. The US economy has exceeded expectations, not only defying widespread predictions that it would fall into recession, but growing far faster than any G7 group of industrial countries and creating 16m jobs since the last election. Unemployment is well below its long-term average, inflation is running at just 2.5% and the stock market (S&P) is up 19% on the year.
Economists have been wowed by this performance. US voters haven’t. The US economy has had two years of strong growth but, according to a Gallup survey in August, 63% of Americans think the economic situation is getting worse. In May, a poll conducted by market research group The Harris Poll found that 55% of Americans believed that the economy was shrinking and 49% thought unemployment was at a 50-year high.
What appears obvious to economists is anything but for many Americans. US blogger Kyla Scanlon coined the term ‘vibecession’ – a compound of vibe and recession – to describe the disconnect between economic fundamentals and people’s perceptions of the economy.
Politics helps explain some of the gaps. Research by the University of Michigan shows that Republicans are much more pessimistic about the economy today than Democrats. The research finds that having your favoured party hold the White House makes you markedly more positive on the economy. When Mr. Biden took office in 2021, consumer sentiment perked up among Democrats and went down among Republicans. This pattern, of sentiment shifting within the electorate according to who is in the White House, has repeated at every election since at least the late 1990s.
But this is not the whole story. The huge upswing in US inflation in the last few years continues to weigh heavy on the American mind. Polling by Gallup finds that Americans still rate inflation and the cost of living as one of the top issues facing the country despite falling headline inflation.
This illustrates another divide between economists and voters. Economists tend to focus on rates of change, inflation, incomes and so on. Consumers care at least as much about levels.
Since 2020 US energy prices have risen by 27%, food prices by 26%, rents 25% and the cost of petrol 24%. Voters going to the polls on 5 November have lived through the most sustained period of high inflation in 40 years. People loathe inflation, particularly in things they buy frequently, such as groceries or petrol. Rightly or wrongly, people tend to see inflation as the government’s fault whereas, according to Harvard economist Stefanie Stancheva, they attribute wage rises to their own performance in their job or career progression.
So while wages are currently growing faster than inflation, many US voters aren’t giving the government the credit. Moreover, for all the recent improvements in spending power driven by the recovery and falling inflation, median real wages and household incomes are still lower than they were at the time of the last US election.
None of this is to say that, collectively, Americans are not spending. Unlike Britain, where consumer spending has lagged the recovery in growth, US consumption has grown in line with GDP. Part of this reflects the rapid growth in the size of the workforce and the population. But there is also the question of which Americans are spending. Overall consumer spending reflects income levels that are heavily skewed to towards the top of the earnings distribution. Higher-income households are the big spenders.
Lower-income households have been hardest hit by the inflation of recent years. Such households spend a larger share of their incomes on food, fuel and rents, categories where prices have risen more rapidly than overall prices in recent years. In January 2023, with inflation at 6.4%, 65% of Americans in the lowest decile of the income distribution expressed themselves “very stressed” by inflation, a figure that fell to 17% for the highest income decile.
There’s a long-term trend at work here too. Looking beyond the ups and the downs of inflation and incomes we seem to be living in a more pessimistic age. A recent US study analysed about one billion local newspaper reports over the last 200 years to construct an index of economic sentiment. The authors found that sentiment, as expressed in the news, is now more negative than in most of the late 19th or 20th century and, remarkably, lower even than during the great depression.
A similar analysis by the Financial Times journalist John Burn-Murdoch reaches much the same conclusion. Burn-Murdoch used Google Ngram Viewer to search for selected words in English, French and German books from 1500 to the present. He found that: “The frequency of terms related to progress, improvement and the future has dropped by about 25% since the 1960s, while those related to threats, risks and worries have become several times more common.”
Leaving such long-term trends to one side, how people feel about the economy is shaped more by their daily experiences of filling up their car or buying groceries than by the movements in high-level economic data. It is a lesson data-hungry economists should take to heart.
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