The market and economy are doing well; why do some of us feel lousy?

January 02, 2024

The market and economy are doing well; why do some of us feel lousy?

The past two years have been a tumultuous period. 2022 saw the start of the war in Ukraine, Fed rate hikes, spiking inflation, and a cratering stock market. The Michigan Consumer Sentiment Index, a widely followed gauge for how
Americans are feeling hit an all-time low of 50 in June 2022—even worse than during the Great Financial Crisis when the index hit a low of 55.

Most economists were also surprised to find out the good news in 2023. A recession was expected to hit at some point during the year. High interest rates, consumers tightening their belts, and a weakening job market were all expected to tip the US economy into its second recession in three years.

But it just didn’t happen. Almost miraculously, inflation fell back to ~3% without any apparent economic repercussions. Consumers continued to spend, the unemployment rate remained low, and job openings were plentiful. Investors have experienced a pretty solid year, too. The S&P 500 entered a bull market mid-year and currently sit at +34% from the 2022 low (as of 12/27/23). The prevailing sentiment, though? Still terrible. The Michigan Consumer Sentiment Index has improved slightly but sits near multi-decade lows. Additionally, survey after survey of Americans point to a level of frustration and disappointment with the economy that does not seem to jive with how the year has actually played out in the economy.

Economists (once again) are puzzled. Sentiment should generally follow large measures of our economy’s health. What is behind the disconnect? There are a few theories, and the answer is probably a combination of them. The first theory is that economic numbers fail to capture economic reality for many people. Take the Great Recession, for example. Not only did the economic fallout disproportionately impact lower-income earners, but the ensuing recovery was also longer and slower for them compared to higher earners. Many economic figures did not do a great job of capturing the full extent of the disparity. Thankfully, the same dynamic does not appear to unfold now, as lower-income gains have been robust. But—it’s possible something is not being captured in the numbers. For example, a person patching together multiple gig-work jobs today might be making more money now than 2-3 years ago, but they might not be pleased doing so.

The second theory is the influence of social media and its negativity bias. How we get our information has changed dramatically in the past decade. The platforms we increasingly rely upon are not necessarily designed to provide facts but to maximize user engagement. And in this type of incentive system, negativity tends to drown out positivity.

The third, and possibly the most plausible, theory is that consumers still need to adjust to new price levels. Indeed, inflation is back to a somewhat normal level, but we do not tend to think in terms of “high or low.” inflation as much as we do “high or low” prices. The decline in inflation does not mean prices have gone back down—it only means they are going up less slowly now. In fact, since 2019, everything we buy in aggregate (as
measured by the Consumer Price Index or ‘CPI’) has increased by roughly 20%. Certain major categories have gone up even more. Home prices (nationally) are now 50% greater than they were only four years ago. Used car prices have been almost 40% more expensive since then. So even if people have been given raises and have relative security in their jobs (as the data shows), it just does not feel like enough to many people. Perhaps the mood will improve if the next two years are less tumultuous than the prior two years. However, it will probably be a while before Americans feel as good as they did only a few years ago.