US economic outlook brightens
After an extended period of gloom, Americans are starting to feel better about inflation and the economy — a trend that could sustain consumer spending, fuel economic growth and potentially affect President Joe Biden’s political fortunes.
A measure of consumer sentiment by the University of Michigan has jumped in the past two months by the most since 1991. A survey by the Federal Reserve Bank of New York found that Americans’ inflation expectations have reached their lowest point in nearly three years. And the same survey, released last week, found that the proportion who expect their own finances to improve a year from now is at its highest level since June 2021.
Economists say consumers appear to be responding to steadily slower inflation, higher incomes, lower gas prices and a rising stock market. Inflation has tumbled from a peak of around 9 percent in June 2022 to 3.4 percent. According to the Federal Reserve’s (Fed) preferred price gauge, inflation has reached the Fed’s annual 2-percent target when measured over the past six months.
Paychecks have outpaced inflation over the past year, thereby easing Americans’ adjustment to a higher cost of living. Weekly earnings for the typical worker rose 2.2 percent last year after adjusting for inflation, the government reported last week. By that measure, inflation-adjusted pay is 2.5 percent higher than before the pandemic.
“While falling inflation took some time to feed through to consumer sentiment, it appears the good news is finally getting through,” said Grace Zwemmer, an analyst at Oxford Economics.
Consumers’ inflation expectations are important because they can become self-perpetuating: When people expect inflation to stay high, they often change their behavior by accelerating purchases before prices rise further, which can, in turn, fuel more inflation. By contrast, lower inflation expectations can reverse that dynamic and help cool inflation.
Even with the steady slowdown in inflation, prices are still nearly 17 percent higher than they were three years ago, a source of discontent for many Americans. Though some individual goods are becoming less expensive, overall prices will likely remain well above their pre-pandemic levels.
Some Americans do have a cheerier outlook now. Hiring has remained solid, with the unemployment rate remaining below 4 percent for nearly two years, the longest such stretch since the 1960s.
Many Americans might still favor having the government take steps not only to slow inflation but also to try to reduce overall prices to where they were before the pandemic.
Economists, though, uniformly caution that any attempt to do so would require a significant weakening of the economy, resulting from either sharp interest rate hikes by the Fed or tax increases. The likely consequence could be a recession that would cost millions of jobs.
David Andolfatto, an economist at the University of Miami and a former Fed economist, said it is better for wages to rise over time to allow people to adjust to higher prices.
“The cost of living is higher, the wages are higher,” he said. “Let’s just move ahead. There’s no need for [the government] to bring the price level back down. It would be too painful.”
Claudia Sahm, founder of Sahm Consulting and also a former Fed economist, acknowledged that “people are angry” about higher prices.
“But then, the next question is, can you afford it?” she asked. “Not everybody can say yes to that question. But over time, more and more people will be able to say yes.”