Americans remain gloomy about the economy despite encouraging signs

Inflation has reached its lowest point in 2 1/2 years. The unemployment rate has stayed below 4 percent for the longest stretch since the 1960s. And the U.S. economy has repeatedly defied predictions of a coming recession. Yet according to a raft of polls and surveys, most Americans hold a glum view of the economy.

The disparity has led to befuddlement, exasperation and curiosity on social media and in opinion columns.

Last week, the government reported that consumer prices didn't rise at all from September to October, the latest sign that inflation is steadily cooling from the heights of last year. A separate report showed that while Americans slowed their retail purchases in October from the previous month's brisk pace, they're still spending enough to drive economic growth.

Even so, according to a poll last month by The Associated Press-NORC Center for Public Affairs Research, about three-quarters of respondents described the economy as poor. Two-thirds said their expenses have risen. Only one-quarter said their income has.

The disconnect poses a political challenge for President Joe Biden as he gears up for his re-election campaign. Polls consistently show that most Americans disapprove of Biden's handling of the economy.

Many factors lie behind the disconnect, but economists increasingly point to one in particular: The lingering financial and psychological effects of the worst bout of inflation in four decades. Despite the steady cooling of inflation over the past year, many goods and services are still far pricier than they were just three years ago. Inflation — the rate at which costs are increasing — is slowing. But most prices are high and still rising.

Adjusted for inflation, median weekly earnings — those in the middle of the income distribution — have risen at just a 0.2 percent annual rate from the final three months of 2019 through the second quarter of this year, according to calculations by Wendy Edelberg, a senior fellow at the Brookings Institution. That meager gain has left many Americans feeling that they have made little financial progress.

Partisanship plays a part

Rising prices have been a key driver of a wave of strikes and other forms of labor activism this year, with unions representing autoworkers, Teamsters and airline pilots winning sizable pay increases.

Other factors also play a role in why many people are still unhappy with the economy. Political partisanship is one of them. With Biden occupying the White House, Republicans are far more likely than Democrats to characterize the economy as poor, according to the University of Michigan's monthly survey of consumer sentiment.

Karen Dynan, a Harvard economist who served in both the George W. Bush and Obama administrations, noted that distinct swings in economic sentiment occur after a new president is inaugurated, with voters from the party opposed to the president quickly switching to a more negative view.

"The partisan divide is stronger than it was before," she said. "Partly because the country is more polarized."

Even so, many Americans are still feeling the pain of inflation. The national average price of a gallon of milk reached $3.93 in October, up 23 percent since February 2020, just before the pandemic struck. A pound of ground beef, at $5.35, is 33 percent higher than it was then. Average gas prices, despite a steep decline from a year ago, are still 53 percent higher at $3.78 a gallon, on average.

All those increases have far outpaced the rise in overall prices, which are up nearly 19 percent over the same period.

Edelberg said the jump in prices for items that people typically buy most often helps explain why many people are disgruntled about the economy — even as Americans have remained confident enough to keep spending at a healthy pace.

"Their purchasing power overall," Edelberg said, "is doing pretty well."

Yet broad national data doesn't capture the experiences of everyday Americans, many of whom haven't seen their wages keep up with prices.

Lower-income Americans, for example, have generally received the largest percentage wage gains since the pandemic. Fierce competition for front-line workers at restaurants, hotels, retailers and entertainment venues forced companies to provide significant pay hikes.

But poorer people typically face a higher inflation rate, according to economic research, because they spend a greater proportion of their income on such volatile expenses as food, gas and rent — items that have absorbed some of the biggest price spikes.

"At the lower end of the income distribution, people got somewhat higher pay raises," said Anthony Murphy, a senior economic policy advisor at the Federal Reserve Bank of Dallas. "But I don't think it compensates them for the fact that inflation was so much higher. They're consuming a different bundle of goods than the average."