Why is there so much pessimism about the economy in the U.S.?

It's been nearly a year since the Bureau of Economic Analysis announced that the U.S. economy had contracted for two quarters in a row. Some mistakenly believe that two quarters of falling GDP is the official definition of recession. Economic negativity spread unchecked, especially among the political right, but not only on the political right.

The interesting question now is why, at least according to some polls, public opinion remains pessimistic about the economy — as much as it was in the past amid severe economic downturns — even though the recession warnings were clearly a false alarm, and the economy is actually showing remarkable strength. Or perhaps the question should be why people say they are pessimistic.

It is a sensitive issue which, however, I have addressed before. This is not to say that Americans are stupid, nor, of course, to resemble that adviser to John McCain who insisted that America was a "country of whiners" that was only experiencing a "mental recession."

On the other hand, there are huge differences between what people say about economics and what both the data and the people themselves say about their experience. And we have new information about what's behind these differences.

First, let's talk about the much-vaunted "Biden recession." Several economic factors are involved in the actual definition of a recession, and apart from GDP figures, nothing that has happened to the economy remotely resembles a recession. Since December 2021, the U.S. economy has added nearly six million jobs, while the unemployment rate has fallen from 3.9% to 3.4%, a level not seen since the 1960s. And no, unemployment is not low because Americans have decided to leave the workforce: the percentage of adults working or looking for work has declined, but this is almost exclusively due to an aging population, and labor force participation has once again corresponded to pre-pandemic forecasts.

In addition, the jobs are of quality, according to the workers themselves. The Conference Board, which has tracked job satisfaction since 1987, estimates that "American workers have never been more satisfied."

Indeed, the return of sizeable inflation after decades of inactivity unsettled everyone, and not just because it reduced real incomes (real wages fell during Ronald Reagan's second term, and yet people had a good feeling about the economy). One of the advantages of low inflation is that it frees you from one thing to worry about; According to the American Psychological Association, rising prices were one of the main sources of stress in 2022.

But inflation, while still high, has fallen sharply. The rate over the last six months has been 3.3%, compared to 9.6% last June. The price of gasoline, one of the main topics of political debate last year, is now more or less normal compared to median incomes.

And people have noticed. In October, 20 per cent of Americans identified rising living costs as the most important problem facing the country; Now that percentage has dropped to 9%.

What is happening? The general rule seems to be that Americans feel good about their personal situation, but believe that others are having a hard time. A Federal Reserve study found that at the end of 2021, a record percentage of citizens were optimistic about their own economic situation, while a record low was optimistic about the economy. We don't have results for 2022 yet, but I think they will be similar.

Much of this divergence can be explained by partisanship. A recently published study shows that who occupies the White House greatly influences what is thought of the economy. This is true for voters of both parties, although it appears that the effect is about twice as strong in the case of Republicans. However, the research also concludes that these differences of opinion do not appear to have any impact on actual spending, i.e. they reflect "support" and not "real expectations".

Apart from this, there is good reason to believe that media reports on the economy have been very negative. One thing that has gone but that very well in the United States in recent times has been job creation. However, people consistently claim that they have heard more bad news than good about it.

And let's not forget the economists. As Mark Zandi of Moody's Analytics points out, many experts have been predicting recession for a year after month. To be sure, sooner or later there will be an economic setback, but as Zandi says, "in my more than 30 years as a professional economist, I have never seen so much pessimism about a recession" even though the economy has resisted. And this pessimism has filtered into public opinion.

So where does this leave us? The United States has yet to return inflation to pre-pandemic levels, and we may still suffer a hard landing. But, at least so far, we have recovered astonishingly well from the blow of covid. While many Americans say in polls that things are going badly—which tells us something about how people respond to surveys and where they get the information from—this doesn't contradict that positive assessment.

Paul Krugman is a Nobel laureate in economics.
© The New York Times, 2023
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