Overview
Despite recent data showing the US economy is recovering, consumer sentiment remains decidedly downbeat. Inflation has cooled significantly from 40-year highs earlier this year, GDP grew faster than expected last quarter, the job market is still strong, and gas prices have plunged. However, people continue feeling glum about both their current situation and future prospects.
This negativity perplexes some economists who expect consumer attitudes to align more closely with macroeconomic trends. Several theories attempt explaining this "sentiment paradox." But the disconnect could impact future spending and growth if pessimism endures.
Top Reasons for Gloomy Sentiment
Lingering Impacts of High Inflation
While inflation has fallen from its mid-2022 peak, prices remain uncomfortably high for many households. Particularly with essentials like food, rent, healthcare, and utilities, people still acutely feel the pinch. This colors their entire economic outlook.
Combined with shrinking real wage growth, many need to cut back spending just to get by. So despite cooling overall inflation, the persistent burden shapes sentient.
Recession Fears Loom Large
Regardless the actual likelihood, fears of an impending recession permeate consumer thinking. Various alarms about declining housing prices, tanking markets, supply chain troubles, and global conflicts exacerbate this angst.
People instinctively prepare for the worst when hearing such ominous warnings. And with recessions usually meaning layoffs and financial duress, this anticipation directly impacts sentiment.
Polarized Politics and Media
The bitter partisan divide also extends to economic perceptions. Where people get their news plays a huge role.
Conservative outlets emphasize negativity and install gloom. Liberal sources highlight progress but get accused of ignorance or denial. These dynamics make objectivity nearly impossible.
Bad Beats Out Good Psychologically
Behavioral economists note people inherently fixate more on threats than positive developments. Losing $100 causes more distress than gaining $100 brings joy.
So when weighing conflicting signals, the bad often wins out psychologically. This phenomenon persists regardless policy outcomes.
| Category | Sentiment Rating | Key Driver |
|---|---|---|
| Current financial situation | Very negative | High inflation continuing to strain budgets |
| Local job availability | Slightly positive | Low unemployment, but recession fears mounting |
| Cost of living | Very negative | Essential goods/services costs still painfully high |
| Local economy | Negative | Housing declines in some areas, markets unnerving |
| National economy | Negative | Partisanship coloring perceptions despite data |
Table 1. Breakdown of latest consumer sentiment ratings across different economic categories.
Economists Attempt to Decode Negativity
Many economists express bewilderment at the ongoing doom and gloom. Some posit theories on why the data fails aligning with attitudes.
NYU professor Paul Romer suggests long lags make people react to older conditions. Sentiment responds to "what they’ve experienced over the past year" rather than recent figures he argues.
Meanwhile Yale economist Robert Shiller notes "animal spirits" and psychology driving swings. People graft wider anxieties onto perceptions Shiller explains.
But Columbia’s José Antonio Ocampo contends geopolitical conflicts, energy shocks, and accumulated debts make pessimism perfectly logical now. "The world economy faces strong headwinds," Ocampo emphasizes.
Though regardless exact cause, the negativity confounds upbeat predictions. And sustaining it could enable very fallout people dread.
Gloom Risks Becoming Self-Fulfilling Prophecy
If sufficiently widespread and persistent, all this gloom acts "like a self-denying prophecy" worries Fed economist Lydia Boussour. Consumer spending drives over two-thirds of US GDP.
So if people excessively tighten belts or won’t spend over recession fears, that alone could ultimately trigger one. Businesses then must cut back activity and jobs to align with weaker demand.
Boussour notes retail data showing this hesitation already. Savings rates recently topped 6% – Americans squirreling away rather than spending. Which then dampens growth projections.
Yet Deutsche Bank’s Matt Luzzetti counters saying fundamentals still support consumption and argues sentiment simply needs catching up.
Either way, analysts agree current disconnects can’t persist indefinitely without real economic fallout. People’s mindset becomes reality for better or worse.
Policymakers Walk Fine Line Messaging Economic Health
Administration officials consequently confront complex messaging dilemmas.
They want highlighting progress lowering inflation and robust job numbers. But risk accusations of misleadingly "spinning" conditions if not empathizing with lingering household hardship.
"There are no easy choices," claims former Treasury Secretary Larry Summers. Officials must validate people’s actual experience. Yet can’t ignore good data either, as that threatens fostering false doom prophecies.
Summers believes striking the right balance remains critical for avoiding sentiment itself spurring decline. People must feel both understood but also that policies chart effective way forward.
Forecasters Expect Gradual Sentiment Improvements
Most economists don’t foresee rapid attitude shifts but see negativity slowly thawing as conditions incrementally improve. JPMorgan recently upped 2023 GDP projections to 1.2% with inflation drifting down toward 3%.
If achieved, steadily declining prices and sustainably positive growth could reorient mindsets. But only so long as geopolitics, policy errors, or some new crisis doesn’t derail progress.
The Fed’s delicate task is sticking its soft landing – taming inflation without triggering severe recession simultaneously. Nailing that would propel sentiment upgrades noted UBS economist Paul Donovan.
But Donovan contends getting emotions catching up with economics takes time even in best cases. "People will believe things getting better only once they actually feel that happening themselves" he explains.
So assuming stability, the paradox should ultimately resolve itself – though not overnight. How patient people prove until then poses key uncertainty.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
