Consumer Economic Sentiment: Perception vs. Reality

Are consumers really blind? Surely, people must have a somewhat accurate read on current economic conditions, right? Yet data suggests otherwise. Despite generally positive macroeconomic trends, consumer sentiment remains starkly pessimistic regarding the economy. In his article “The Matrix of Consumer Discontent,” Paul Krugman provides a multifaceted explanation for this paradox between perceived and actual reality. His considerations acknowledge essential factors contributing to positive economic outcomes, namely, the United States' largely successful post-pandemic recovery. However, while consumer spending has rebounded, the inflation rate has dropped unprecedentedly, and wages have kept up with prices, another significant change has occurred since COVID-19: dismantling the social welfare net. 

Across the political spectrum, Americans harbor largely negative outlooks on the economy. (see Fig 1.) However, as Krugman points out, this pessimism is highly partisan. Notably, Republican sentiment on the economy spiraled downward following the election of Biden, before heightened inflation, despite that being cited frequently as a concern. 

Figure 1. | Source: Pew Research Center

At the same time, the economy is doing significantly better, recovering across a string of metrics since the pandemic led to historic performance lows. Krugman’s focus is generally macroeconomic; still, tracking even non-macro measures corroborates his point. In her article examining household-level factors, economist Claudia Sahm concludes that “most Americans are financially better off regarding their jobs, wages, spending, wealth, and debt.” Even rent has rapidly fallen to pre-pandemic levels. So, given these factors, why does consumer sentiment remain stubbornly low? 

Krugman offers four possible sources of consumer discontent in his piece, all of which provide insights into the juxtaposition between economic results and public opinions following the pandemic. But he does not explore another facet of pandemic vs. post-pandemic economic realities, one that directly impacted millions of Americans––social welfare. During the height of the pandemic in 2020, the government provided stimulus payments, increased housing and food assistance, bolstered health coverage, and expanded unemployment insurance. Together, these policies pushed the poverty rate down to historic lows. (see Fig 2.)

Figure 2. | Source: Center on Budget and Policy Priorities

However, following the rollback of these welfare programs, homelessness, poverty, monthly eviction rates, and food insecurity all increased significantly. Not to mention, many have lost Medicare and student loan relief access.

While removing these programs is only one part of the broader economic disillusionment many Americans feel or––in some cases––have been made to feel, it remains a significant possible driver behind widespread consumer dissatisfaction. We are spending a similar amount, and we generally are financially better off, but the dissolution of these governmental aid programs results in broader insecurities. Gross domestic product, unemployment, and inflation are undoubtedly relevant factors, but they fail to capture the full breadth of America’s economic state. The fact is that an increasing number of Americans feel financially insecure (a record 33%), which, though still disproportionate to the pervasive economic dissatisfaction, must not be neglected in the analysis.

While macroeconomic indicators show positive trends, consumer sentiment remains overwhelmingly pessimistic, possibly driven by the rollback of pandemic-era social welfare programs. Krugman considers past inflation woes, shallow data, and faulty narratives. All of these factors play a role in consumer discontent, especially misleading media narratives. Yet, the rapid abolition of the robust social welfare net constructed during the pandemic, which has left millions with diminished access to essential services and many more in poverty, presents itself as a significant potential driver of consumer disillusionment.