Why does the economy feel bad despite experts saying it’s good?

Why does the economy feel bad despite experts saying it's good?

The Disconnect Between Economic Numbers and People’s Perception

Scrolling through social media or having conversations with friends, it can sometimes feel like the good news about the economy isn’t reaching the general public. In fact, a recent CBS poll revealed that 61% of respondents believe the economy is “struggling,” and 65% describe it as bad. So why is there such a disconnect between economic numbers and people’s perception?

The answer lies in the way facts and figures don’t always align with how people experience the economy in their daily lives. Years of rising prices and recession fears have left some households fearful of what the future holds. This phenomenon, dubbed the “vibecession” by some, is very much alive and well.

“The economic news for the first half of 2023 was dominated by big tech layoffs, rising interest rates, and bank failures,” explains Kelly Gilbert, a fiduciary investment advisor at EFG Financial in Grand Rapids, Mich. “So, while we have jobs, Americans have always been waiting for the other shoe to drop.”

One key factor contributing to this disconnect is inflation. While inflation may be moderating, it certainly isn’t reversing. The cost of everything, from food to housing, is still significantly higher than it was just a few years ago. This is a significant concern for households, as food prices alone increased by an astonishing 11% from 2021 to 2022. Food is the third-largest expense in the typical family’s budget, after housing and transportation. Trimming superfluous spending can only go so far when it comes to unavoidable expenses like eating.

Housing costs also play a significant role in people’s economic perceptions. Many individuals who couldn’t buy a home during the low-rate period in 2020 now feel locked out of the market for the foreseeable future. Both the soaring prices and the reluctance of current homeowners to sell and lose their low-interest rates have created a situation where renters are paying significantly more for less. Homeowners, although benefiting from their home’s increased value, often find it challenging to access that equity for day-to-day expenses.

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This sense of economic angst is especially prevalent among Gen Z. Christine Channels, head of client service and community banking at Bank of America, notes that the younger generation is struggling to save and spend within their means due to the soaring costs of housing.

“Though the economy is improving, the everyday consumer is not feeling the benefit in their wallet,” Channels adds.

Another factor affecting people’s perception of the economy is the impact of interest rates. For those with debt, the Federal Reserve’s interest rate campaign translates into higher borrowing costs. While savings rates may be increasing in tandem, the burden of increased borrowing costs is much more significant for consumers’ budgets. Additionally, millions of individuals will soon face the resumption of federal student loan payments, adding a substantial additional expense to their monthly bills.

Interestingly, even six-figure earners are feeling the pain of inflation. While these individuals may be at the top end of the income spectrum, many report living paycheck-to-paycheck, highlighting the sting of rising prices.

Adding to the doom and gloom is the constant drumbeat of recession predictions. Although a recession has not materialized, it is easy to understand why individuals might think the economy is on the verge of collapse when headline after headline points to an imminent downturn.

However, it’s not all negativity. According to the University of Michigan’s consumer sentiment index, the vibes are beginning to improve. In July, the index rose by 8.2 points to 72.6, the highest level since September 2021. The stock market is rallying, and gas prices are significantly lower than they were a year ago, both of which contribute to a more positive sentiment.

Still, the reality remains that families are paying more for essentials, saving less, and accumulating record credit card debt. Consumer sentiment is still below pre-pandemic levels, and the stock market’s rally is somewhat meaningless when investors have yet to recover their losses from 2022.

“Many of my clients are still cautious because they feel the pain but can’t point to a specific reason, and that scares them,” notes Gilbert.

In conclusion, the disconnect between economic numbers and people’s perception is a result of their lived experiences not aligning with the facts and figures. Rising prices, particularly in essentials like food and housing, are creating a sense of economic anxiety. The impact of interest rates and recession predictions only adds to the prevailing negativity. While there are signs of improvement, such as the uptick in consumer sentiment, the challenges remain significant.